It's hard to imagine many metal miners who aren't glad to put this year in the rearview mirror. Worries about Chinese demand and inventory have investors worried about copper, iron ore and met coal prices, and the global economy offers little counterweight to that reliance on China. Although it's a well-run company that generally manages its capital well, BHP Billiton (NYSE:BHP) is still a prisoner of its markets - if commodities rebound in 2013, so too will the stock.
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Fiscal 2012 Ends In-Line
BHP Billiton reported basically the numbers that investors were expecting, though that's not to say it was a strong end to the year. While higher energy prices helped a bit, weaker prices for iron and copper definitely pinched. Revenue for the second half of the year declined 7% from the first half, while underlying EBITDA and EBIT fell 20% and 26%, respectively. Although base metal profits were actually up sequentially (by 20%), iron ore was down 20%, petroleum was down 39%, and the company saw a huge drop in profits from met coal. It's well worth repeating that these numbers were pretty much in line with expectations, so it's unlikely that the stock will react dramatically.
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Shuffling the Budget
Investors pay careful attention to the capital spending plans of major mining companies like BHP Billiton, Rio Tinto (NYSE:RIO), Vale (NYSE:VALE) and Anglo American, and with good reason. Not only do their plans ultimately feed into the demand outlook for companies like Caterpillar (NYSE:CAT), Komatsu (OTC:KMTUY), Atlas Copco and Joy Global (NYSE:JOY), they also go a long way toward establishing future supply-demand projections.
To that end, the biggest news from the BHP release was that the company is deferring its Olympic Dam copper project in South Australia. This project was estimated to cost anywhere from $20 billion to $30 billion to develop, and though the company is not abandoning the site outright, it seems that management wants to find a less capital-intensive means of exploiting the reserves here.
Although this news was not a major surprise, it could have some interesting far-reaching effects. I cannot imagine that Freeport-McMoRan (NYSE:FCX) is sorry to see the delay/deferral of a major copper project in the same hemisphere as its Indonesian assets. At the same time, I wonder what this says about the rising cost of mining projects in Australia and whether it will lead other companies to curtail projects built around copper, iron ore and coal. This news could be incrementally positive for companies like Peabody (NYSE:BTU) or Vale, which either have production under way or projects in lower-cost regions of the world.
It's worth noting, though, that BHP will still be spending a lot of money on resource projects in the next year. Not only will the company be drilling more in the Permian, but it plans to expand copper (Escondida), met coal and oil/gas production (including Gulf of Mexico assets).
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The Key is Always the Same
Not surprisingly, the biggest unknown with BHP Billiton is the price direction of commodities like iron, copper and coal. If China can resume a growth/consumption trajectory, inventories will dwindle and prices will head up again. There's a school of thought, though, that the best years of the boom are over, and that China simply does not need to consume resources like it has in recent years. I don't really believe that - there is a lot of economic development left to do outside of the eastern coast, to say nothing of what remains to be built in countries like Brazil, Indonesia, India and Vietnam. Perhaps the pace of the demand won't be as ravenous as before, but it's hard to imagine demand not picking up over the next couple of years.
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The Bottom Line
Although bargains can be found in companies focused on petroleum, iron and copper, BHP Billiton does not look dramatically cheap today. Even if the stock deserves an average forward EBITDA multiple (at a time when many focused companies trade at lower-than-average multiples), the stock looks maybe 15-20% undervalued today. That's not terrible, I'll grant, but I think investors willing to shop a little more thoroughly can find better bargains in the resource sector.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.