BHP and Rio have been pretty disappointing performers considering there is a commodity boom, one of the few bright spots in the global mess. The stock is down by almost a fifth since mid year. At some point it has to be good buying. UBS has a buy on the stock, with a 12 month price target of $53, a very healthy capital gain on the current level. It has a forward dividend yield of 3.1% and forward earnings multiple of 9 times. Given that it is blue chip, this looks pretty healthy, posing the question: “Why doesn’t the market like it?” The answer surely has to be that its size and diversity means that it is rated as a proxy for the global economy. And the global economy is looking pretty sick, despite China’s continuing strength.
UBS has this to say about the shale gas situation for BHP:
Shale gas to dominate US gas supply. BHP Billiton sources work done by Wood Mackenzie when it comes to outlining the outlook for the US gas market. Essentially the US gas market is seen growing from ~65Bcf/d today to 75Bcf/d by 2020 and 90Bcf/d by 2030 with shale gas expected to be almost 50% of total US gas production by 2020. BHP also believes that as long-term shale gas supply is substantiated, the current oversupply will be absorbed. This is where we become concerned; as the oil majors enter the realm of shale gas, there is a growing likelihood that near-term supply increases, as these larger oil companies utilise their substantial cash flow to increase drilling and lift production. BHP Billiton is looking to triple production to upwards of 1,000Mboe/d by FY 20. (4) BHP has a significant resource position. With the acquisitions of Fayetteville and Petrohawk, BHP Billiton has secured four extremely large and concentrated acreage positions within US shale gas. These assets each have attractive features that provide strong economic returns based on the forward curve for NYMEX gas pricing.
Macquarie sees upside in iron ore, at least in the short term:
- Mills are restocking iron ore but there is still some way to go. Iron ore prices have pushed up strongly since bottoming out two weeks ago, recovering nearly $25/t from the lows of $116/t. As we noted in our China Commodity Call of October 31, the sharp decline in inventory over October meant mills would have to return to the market to replenish stockpiles. This process is now underway but with the latest inventory data suggesting restocking is only partially complete, we still see further upside in the iron ore price from here.
- A key data point in assessing iron ore price movements this year has been the average level of iron ore inventory held by 50 smaller steel mills. After remaining in a range of 28 to 33 days from March to September this year (with spot iron ore prices fluctuating between $160-180/t CFR China for 62%Fe material), the volume of inventory collapsed down to 21 days over October as mills went on a buying strike and prices dropped to $116/t.
- The latest data, representing the inventory position on November 11, shows that mills have begun to replenish stocks, with inventory cover rising to 26 days. This still looks low and we expect buying activity to continue until inventory levels at least normalise. Note also that last year, inventory blew out to 45 days ahead of Chinese New Year – this is a seasonal event reflecting the difficulty in obtaining domestic concentrates as the cold weather freezes the water supply needed for beneficiation and the loss of staff throughout the logistics chain as workers return home for the holiday.
So why is BHP’s stock price so weak? Deutsche has a 16% weighting in its ideal portfolio, higher than BHP’s 11% index weighting. But the stock is not doing well. It is surely a symptom of a fear at the very heart of the markets. The current turmoil is something they have not seen for many years.