As I write, BHP shares change hands at just 1,484p, suggesting that investors who bought in Christmas spirits four years ago may now be sitting on a 43% loss.
However, I believe that 2015 could prove to be the turning point for the big miners, amongst whom I rate BHP very highly. Heres why.
BHP is making massive efficiency savings that should help maintain its profit margins, even at lower commodity prices. By 2017, the company believes it can deliver $4bn of annual cost savings across its main assets.
Spending is also falling: capital expenditure next year is expected to be $14.2bn, down from a previously planned $14.8bn.
Although the falling price of oil will cause BHP some pain, most of its petroleum operations should be able to withstand this.
BHPs strategy to cut costs and increase iron ore production has been aimed at forcing higher-cost competitors out of business. This seems to be starting to work: this week has seen reports that a number of other iron ore miners in Australia are laying off hundreds of staff, as production is cut.
The acid test will be whether Chinas high cost iron ore miners start to make similar cuts if so, then that would almost certainly mark the bottom for iron ore, in my view.
Spinoff is shareholder bonus
I dont think the market has recognised the value in BHPs planned demerger of the majority of its coal, aluminium, silver and manganese and nickel assets. This is effectively a capital return to shareholders, who will receive all of the shares in the new firm and can of course sell them immediately, if theyd rather have the cash.
Collectively, these assets add little to BHPs bottom line, so should have little effect on the firms share price when they are spun off. On the other hand, they are substantial assets in their own right, and with focused, efficient management, I believe they should be able to generate positive returns over the next few years
Finally, BHP looks pretty cheap at the moment, trading on a 2015 P/E of 10.5 and a prospective yield of 5.7%. BHP has a very strong track record of dividend growth, and this payout should support the miners share price, even if profits weaken.
I believe BHP is a strong buy, but whether you agree with me or not, I’d strongly recommend you take a look at “7 Simple Steps For Seeking Serious Wealth“.
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