BHP shares don’t face ‘Glencore moment’
Ken Odeluga December 1, 2015 1:06 AM
<p>BHP Billiton and Vale’s JV Samarco continues to face consequences in Brazil. These obligations go back further than the beginning of the month. But shares […]</p>
BHP Billiton and Vale’s JV Samarco continues to face consequences in Brazil.
These obligations go back further than the beginning of the month.
But shares of the Anglo-Australian miner were punished the most in 7 years only on Monday, after state prosecutors announced a $5.2bn lawsuit for the 5th November collapse of Samarco’s dam in South Eastern Brazil.
BHP’s stock sold off as much as 6.5% in London.
The decline continued in the US session at time of writing, though BHP’s ADR only fell 4% at its worst (and was well off lows at online time) partly reflecting shallower liquidity.
Samarco’s Dirty business
Samarco was already fined 250 million real by Brazil’s environmental agency, after the disaster covered the flood plain in mud for 80km, polluting the Rio Doce River and contaminating water supplies for a quarter of a million people.
On an absolute basis then, the sharp sell off in London was well justified.
After all, should the miner now need to make further savings—its remarkably generous dividend would probably be the first thing to cut.
Despite falling commodity prices, BHP paid $6.5bn in its last financial year, yielding 5 percentage points above the FTSE 100 average; more generous than any rival.
It has pledged to maintain pay-outs at recent levels, making them the stock’s main differentiator.
But with earnings forecast to fall to $2.5bn, the miner would have to dip into its $6.8bn cash reserves to honour its pledge.
Dividend cut could be lined with silver
All the above said, the financial fall-out from the tragedy probably doesn’t represent BHP’s ‘Glencore moment’.
Pausing dividends could turn out to be an underlying positive.
There are questions of sustainability about pay-outs forecast to yield 9.3% during the next 12 months.
The C-Suite already signalled it sought an excuse to waive its pledge.
Both Chairman Jac Nasser and CEO Andrew Mackenzie stressed the miner’s balance sheet and credit rating were priorities at its recent AGM.
And with 16.7% of BHP’s free float traded relatively infrequently, according to Thomson Reuters data, management could probably count on a large constituency not to sell their shares aggressively.
Playing the green card
In fact, bears might sense more honey in the medium-to-long term, rather than less, if the stream of cash to shareholders continued unabated.
That might happen if the legal impact of the Samarco disaster turned out to be less punitive than foreseen.
Also, note Samarco’s announcement on Monday that it could “seek additional financial support from other private, public and non-government organisations”.
Regardless of Samarco’s probable and ultimate culpability, the JV might have a point.
The disaster could yet be a positive environmental opportunity.
It could provide an incentive for the long-term recovery of the river valley.
That in turn could generate NGO support, lessening the financial burden on Samarco, even if not enough to avoid a dividend cut.
Such a scheme might not gain traction anytime soon, but its potential might begin to be evident by BHP’s next year end.
Reprieve for a ‘hanging man’?
That would be less than attractive for BHP’s stock downside, and current trading may reflect this on a technical basis.
The London stock on Monday tested and closed above 767.9p.
That’s one of the last barriers protecting 681.9p winter 2008 ‘credit crunch’ support.
At the same time, the City session ended with a ‘hanging man’.
That candle can signal bulls are losing their grip, though it may not denote an imminent sharp sell-off.
The shares also backed up from a falling trend in place since at least April.
Crossed oversold lines on Slow Stochastic momentum may also be less negative than outright bears would like.
Especially as the view for a recovery was corroborated in shorter time frames.
All in, charts may not necessarily suggest a bear attack on BHP is out of the question.
Please click image to enlarge
Just, that on balance, conditions are not optimum.
Relatively speaking, they may never be.
Remember, Glencore’s net debt is still worth a fearsome 64% of core earnings over the last 12 months.
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