Investment Column: BHP Billiton is no gold mine for investors

Wolseley; Hunting
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The Independent Online

Our view: Avoid

Share price: 1372p (+28p)

The slowdown in worldwide growth was highlighted last week when China said that its GDP was growing at 6.1 per cent, the slowest rate ever recorded. The effect on those that supply raw materials is obvious: demand from places such as China will continue to fall as manufacturers rely on stockpiles to produce fewer goods.

Thankfully for shareholders in the Anglo-Australian mining giant BHP Billiton, the slowing demand from China and other previously high-growth economies appears so far to be largely priced into the company's stock, which was almost unmoved yesterday as the company reported falls in third-quarter production.

The group, which owns 57.5 per cent of the world's biggest copper mine, Escondida in Chile, said that it is dealing with the fall in demand for commodities prudently, but warned, for example, that its copper output would fall 30 per cent this year. The company also said that more iron ore customers are seeking deferral on some long-term contracts, and as such it is selling an increasing amount of iron ore at cheaper spot prices. Production in other areas was also down in the third quarter. The group also said that despite slower production in the third quarter, mining activities across the group were up over the first nine months of the financial year

The fact is BHP Billiton is performing well, relative to its peers, despite the slowdown in demand, but the question for potential investors is whether they want to be exposed to miners at all.

Analysts at Evolution conclude that clients should sell the stock. They confirm that yesterday's production report was in line with expectations, but, "while recognising its balance sheet strength, we believe that BHP Billiton is relatively overvalued against a peer group that still fails to reflect the reality of the commodity markets – fundamental oversupply leading to further price weakness. With the company exacerbating this oversupply... we retain our sell recommendation."

If we thought that global demand for commodities was set to soar, we would be buyers of BHP Billiton: it is in a better position than its indebted rivals such as Rio Tinto. Sadly, with the company saying that medium-term market conditions will remain uncertain, it is difficult to back the stock. Avoid.


Our view: Tentative buy

Share price: 1188p (+2p)

In the past year or so there has not been a huge amount of cheer from the building materials group Wolseley, which owns the Plumb Center outlets in the UK, and which has particularly struggled with its exposure to the downturn in the US housing market.

Thankfully there was some good news yesterday, as the company announced that investors had taken up more than 98 per cent of rights on its £1bn equity call, which was launched in March. The proceeds will counter the effect that some of its US operations have had on the balance sheet, and will be used to cut debts, which stand at around £2.5bn.

Given the fact the group's share price barely moved yesterday, it is clear the market has thought for a while that the equity call would cause few problems, and indicates for all those hunters of green shoots that the company appears to be doing better. The 30 per cent hike in the shares over the last month also gives strength to the argument that things are finally starting to improve.

There are dangers, of course. While Wolseley says it will now focus on its core markets, we are still in the midst of a nasty recession that will continue to cause problems. On the other hand, punters might decide that the group is through the worst, and with an undemanding rating, they may conclude that now is a great time to buy. We lean towards the latter. Tentative buy.


Our view: Hold

Share price: 406p (+6.5p)

If the energy services group Hunting relied entirely on its US gas drilling business, which has seen a 40 per cent drop in activity, it would be in trouble. Thankfully, according to yesterday's update, the company's operations elsewhere have been strong and it has hit targets for the start of the year.

Investors will note that the shares trade at quite a chunky discount to the sector, but before punters jump in assuming they are getting a bargain, they should note that the stock has struggled in recent months, as markets have generally improved. We are also nervous about a lack of visibility.

The group does have plenty of cash and a round of acquisitions, including yesterday's announcement of the $55m buyout of NCC, should add earnings this year.

The group's shares are not being rewarded, however, and we would wait for signs of life before buying. Hold.