About the author:
- Author name:
- By Adrian Prendergast
- Job title:
- Senior Analyst
- Date posted:
- 17 March 2017, 11:25 AM
- Sectors Covered:
- Mining, Energy
Volatility creates buying opportunity
BHP Billiton (BHP) has seen its share price decline by approximately 13% from its peak in late January. We were waiting for potential volatility from a moderation of the spot iron ore price rally, but are happy to settle for USD volatility, which has also weighed on short-term sentiment. Any weakness in iron ore prices from here would see further downside potential for BHP's share price, but in our view this would only push the big miner further into buy territory given our conservative price forecasts for raw materials.
Fundamentals are stronger than the market thinks
Some pundits have attempted to link the recent volatility in oil prices to an increase in US shale activity. In reality, the increased output has not materially changed the current demand-supply balance. Rather, we expect the material shift in global sentiment around US Fed interest rate expectations (and resulting US dollar fluctuations) explains a larger part of the recent weakness in oil (and iron ore prices). We do believe that unconventional supply will temper the magnitude and timeline for oil's recovery, but equally we expect shale supply will have to be price induced.
Updated commodity forecasts
We remain reactionary in iron ore and have again upgraded our FY17/18 forecasts. We have also marked-to-market BHP's basket of commodities with the end of the March quarter approaching. Additionally, we have trimmed our long-term forecasts for Brent oil to US$70/bbl (from US$75/bbl). The net impact of changes to our price deck has been upgrades to forward earnings. The ongoing upgrade cycle for commodities remains a major factor behind our positive sector call on mining.
Investment view - add on weakness
Now back in buying territory, we recommend adding to positions on weakness. We continue to believe there is room for some moderation of the iron ore price rally that would see some additional short-term downside for share prices, but the selling pressure already seen has, in our view, pushed the big miner back into buy territory (particularly given our belief that we are in a multi-year recovery/upgrade cycle for resources). The key risk remains the potential for commodity price volatility.
We upgrade our recommendation from Hold to Add with an increased share price target.
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Disclaimer(s): Analyst owns shares.
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