Macquarie Research has put a $32 price target on BHP Billiton stock and an ‘outperform’ recommendation, indicating that the stock could rise by close to 20 per cent in the year ahead.
Macquarie issued a note to investors after visiting the company’s Olympic Dam copper, gold and uranium mine in South Australia, which may be about to undergo significant expansion.
BHP’s Brownfields Expansion project (BFX) would double the rate of underground development from 30 kilometres a year to 60 kms.
The company has flagged a significant investment of more than US$1 billion over the next five years.
Macquarie’s view is that this would be money well spent. It says: “The BFX project is largely driven by improved ore body knowledge. BHP will more selectively mine higher grades.”
Current estimates put the Olympic Dam copper resources in excess of 120 million tonnes. At current production rates it would take 500 years to deplete it.
It is the world’s third largest copper deposit, the world’s third largest gold deposit and the largest uranium deposit.
In an earlier note, following the BHP Billiton annual general meeting in Melbourne last month, Macquarie was positive about the appointment of Ken MacKenzie as BHP chair.
MacKenzie, a chief executive of Amcor, was appointed to the BHP board in September last year and took over the chair in June.
“We believe MacKenzie’s background and transformational track record as CEO of the low-margin manufacturing operations at Amcor bode well for his tenure as chairman of BHP, during which he will oversee continued focus on productivity and incremental wins across the portfolio.”
In the year to June, BHP reported revenue of $38.3 billion and net profit of $5.9 billion. The dividend yield was 4 per cent and return on equity 12.1 per cent.
Macquarie is forecasting revenue of $40.1 billion in the current year and a net profit of $6.3 billion. It expects the company’s ROE to fall to 10.7 per cent.
“BHP’s goal of achieving productivity gains of $2 billion by the end of 2018/19 appears achievable, given recent improvements,” Macquarie says.
In addition, the company’s earnings are leveraged to improving petroleum and gas products, and “appears relatively cheap on spot process.”
It has been a big year for the BHP, which came under pressure from hedge fund manager Elliott Management. Elliott proposed a “value unlock” plan for BHP, which included the demerger of its US petroleum business and unification of the structure of the remaining business (it is currently split between an Australian registered company and a British registered company).
Elliott argued that steps need to be taken to address BHP’s “chronic underperformance”, an argument that resonated with other investors and prompted the company to address some of the concerns. Most notably, it is looking for a buyer for its US shale oil business.
The BHP share price hit a peak of $43 in April 2011, before going into a decline that ended at $15.48 in January 2016. Since ten it has climbed back to its current price of around $27 (Friday’s close was $27.58). At that price, its market capitalisation is $87.7 billion.