BHP shares don’t face ‘Glencore moment’

<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.

 

 

DAILY CHART

BHP BILLITON DAILY 30TH NOVEMBER 2015

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.

BHP’s?

‘Just’ 25%.

 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.