MARKETS SPECTATOR: BHP booster

Goldman Sachs believes BHP Billiton's diverse asset base will allow it to continue to outperform Rio Tinto.

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.

image

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.

{{content.question}}

Mastercard

{{ twilioFailed ? 'SMS Code Failed to Send…' : 'An SMS verification code has been sent ...' }}

Hi {{ user.FirstName }}

Looks like you have already taken a free trial

Please enter your payment details

We have sent you a code via SMS to {{user.DayPhone}}

please enter this code below to complete your SMS verification

We cannot send you a code via SMS to {{user.DayPhone}}

If you didn't receive SMS code please

SMS code cannot be sent due to: {{ twilioStatus }}

Please select one of the options below:

Looks you are already a member. Please enter your password to proceed

Please untick this box when using a public or shared device


Verify your mobile number to proceed...

Please check your mobile number below and press the Send Verification Code button. This will be used to complete your verification in the next step.

Please sign up for full access

Mastercard

Updating information

Please wait ...

Trial

Mastercard
{{ productPrice }} / day
( GST included )
Price $0
GST $0
Discount -{{productDiscount}}
TOTAL {{productPrice}}
  • Mastercard
  • Visa

Please click on the ACTIVATE button to finalise your membership

Mastercard

The email address you entered is registered with InvestSMART.

Please login or select "Don't know password"

Please untick this box when using a public or shared device


Register as a new member

(using a different email)

Related Articles