BHP Billiton going about business

BHP Billiton released an operational update on Wednesday for the half year ending December 2013. The results were slightly lower than analyst estimates, but were still positive with increased output in 8/10 of their commodity divisions. The down side however is that commodity prices have fallen since December 2012, with the major exception being the price of Natural gave which is up 15% (good news for Sasol). The impact of the increased output with lower sales prices will only be released on the 18th February, when the company reports their financial results.


The petroleum liquid production increased by 9% for the 6 months, driven primarily by a 72% increase in production on Onshore US. It is amazing what fracking and shale gas has done for production in the US, putting aside the environmental debate, cracking is good for the economy, it makes you energy independent and if South Africa did it, would slow the weakening of the Rand through improving the current account deficit.


What are the prospects for the company going forward? They are spending $16 billion on capital and exploration costs for 2014, with over 10 projects in the pipeline ranging from coal to iron ore to natural gas. It is always good to see companies investing in future projects and help ensures the future of the company. The problem though in the commodities industry is that there are many new operations coming online over the next few years, but India and China are not consuming as much as was forecast.


The result of the lower consumption is that commodities prices have dropped over the last year. Where is added demand going to come from? The Chinese demand shouldn't be going anywhere, and as they keep growing the absolute quantity of raw materials needed will rise, then there is the rest of the developing world. According to Bill and Malinda Gates, their foundation releases an annual letter talking about development, the letter released for last year predicts that by 2035 there will be no more low-income countries left. If his forecasts are right, then there is more than enough demand in the pipeline.


I don't think that BHP Billiton is going to shoot the lights out in terms of share price performance in the coming years, but I also don't think that they are going to go backwards. Their portfolio mix is the best out of the miners, and there is going to be a demand for their product for the foreseeable future. All in all, I wouldn't be complaining if I had Billiton in my portfolio, and if you think that the Rand is going to R20 to the dollar then it will be a good hedge.