MARKETS SPECTATOR: BHP booster
Goldman Sachs has restarted its coverage of the Australian-listed lines of BHP Billiton and Rio Tinto with a buy and neutral recommendation.
BHP is its preferred large cap exposure to the mining space given its diverse portfolio, in particular its shale gas and petroleum assets which should see it deliver relative outperformance.
At this stage of the cycle, Goldman believes a discussion about the relative advantages and corporate strategy is more important than broader macro and commodity issues that have been dominating mainstream media.
"The sector is not broken, just evolving: With the tailwinds of the commodity super cycle receding, we believe that the ‘easy ride' of mining company profitability from commodity price escalation is over,” Goldman said.
"Mining companies now need to focus on delivering outperformance from internal drivers such as cost reduction, high yielding volume growth and innovation/exploration, rather than relying on commodity price momentum alone,” in our view.
With a price target of $40 and a better portfolio, the broker believes BHP's diverse asset base will stand it in good stead and allow it to continue to outperform resources and Rio Tinto, particularly in a post-Chinese industrialisation environment.
There is growing talk about the shale gas revolution sweeping across the US and how it is going to revive the US manufacturing sector through the provision of cheap energy and make the US a net exporter of energy by 2020.
With this in mind, Goldman believes BHP's shale acquisitions have been viewed unfavourably by the market. It sees them as providing considerable potential production, earnings and net present value upside from continued advancement in the drilling and extraction technology.
In the broker's eyes, BHP's key advantage is its broader commodity mix and exposure to ‘late cycle' commodities such as energy, shale and potash in a world that is fast getting used to post-Chinese industrialisation.
Source: Iress
The above chart shows BHP's relative outperformance versus Rio Tinto over the last year, especially since the July/August lows. The broker believes this will continue due to the diversity in BHP's portfolio as compared to Rio's.