BHP Billiton plc Is Facing An Unprecedented Number Of Problems!

BHP Billiton (LSE: BLT) will be glad to see the back of 2015. Indeed, even though we’re barely four months into the year, the company has already been hit by a wave of bad news and things could get a lot worse. 

Uncertain industry

BHP’s biggest problem by far is the sliding price of iron ore. Yesterday, the price of iron ore settled at $48 per tonne, a 10-year low, and Australia’s government believes that the price could drop another $13/t, to $35/t.

It’s estimated that BHP produces iron ore for around $34/t. On that basis, the company could see margins at its iron ore division squeezed to zero over the next 12 months. 

Unfortunately, BHP’s troubles don’t stop there. Commodity prices around world are in free-fall and the outlook for BHP’s spin-off, named South32, is rapidly deteriorating. 

Spin-off

When separated from its parent, South32 will own some attractive long-life assets. These include the Worsley alumina refinery in Western Australia, Cerro Matoso in Colombia — one of the world’s largest nickel producers — and Cannington, the world’s largest silver mine.

However, following a 15% reduction in aluminium price forecasts and 10% fall in nickel price projections, the value of South32’s assets, which were worth $16bn last year, has fallen 25% to $12bn at time of writing. In addition, City analysts have reduced South32’s initial earnings estimates by 26%. 

This isn’t good news. BHP has already spent $270m planning the South31 separation so it can’t stop the process now. Another $468m of costs are expected when shareholders approve the deal, bringing the total cost of the divorce to $738m. 

Tax troubles 

BHP can’t control falling commodity prices, but the company can control its tax affairs. Unfortunately, on this front, BHP has failed to live up to expectations. 

In particular, the company is now under pressure from the Australian Senate’s inquiry into tax avoidance. The inquiry was set up to investigate alleged widespread profit shifting to low-tax regimes, specifically Singapore, by large multinational corporations.

BHP, and the company’s peers Rio Tinto and Glencore, all stand accused of funnelling sales from Australian operations through Singapore to lower their tax bills.

According to news reports, BHP has been reprimanded for ‘stonewalling’ the enquiry. The group has failed to provide basic financial information about its own operations and has suffered serious reputational damage in Australia as a result. 

The bottom line 

With all these factors bearing down BHP, City analysts have slapped an unprecedented number of ‘sell’ recommendations on the company’s shares. But this doesn’t mean you should follow these recommendations and sell up. 

Indeed, as the world’s largest diversified mining company, I think BHP is a great long-term play on global economic growth.