Are these big miners positioning well for a bullish stance - BHP Billiton, Rio Tinto & Fortescue?

What we saw this week has been a very sinusoidal movement in terms of commodity prices, with copper witnessing an enormous slide, and thus respective equities were seen to be retreating a bit. Mid of the week, aluminium (which has been the best performing commodity lately) was also seen falling for a third day to its lowest in a month. Primarily, the rally that found support from tightening of supplies and a rise in Chinese demand, seems to have been fading. Sluggishness in China’s growth has ignited many to stamp-down on the key commodities. This coupled with fall in the London Metal Exchange has led to the commodities retreating this week. Copper, which saw a tremendous fall on Tuesday, edged a bit up later while iron ore prices dropped at the back of drop in Chinese steel futures. Given the volatile nature of the commodities, the earlier highlighted bullish stance on big miners again seem to be under evaluation. Below is an insight on three biggies of the sector and our view in terms of gaining an exposure.
 

BHP Billiton Ltd (ASX: BHP)

BHP Details
 
Key Performance and Growth Plan: BHP is a world-leading resources company that has performed well on the latent capacity projects, with first production from the Los Colorados Extension project and the Olympic Dam Southern Mining Area achieved in the September 2017 quarter, while the Caval Ridge Southern Circuit project is progressing to plan. In Petroleum exploration, evaluation of the positive drilling results from Wildling-2 was said to be continuing, with a side-track and is also encountering oil in multiple horizons which will assist with establishing the scale of the discovery. Major development work has commenced on the recently approved growth projects, Mad Dog Phase 2 and the Spence Growth Option, and both are set to become operational as their respective markets in oil and copper rebalance. As the group moves into Southern Mine Area, BHP expects to see the copper grade to increase to 3% by FY2023; and if approved, Brownfield Expansion Option (BFX) could lift production capacity to 330 ktpa and move Olympic Dam into the first quartile of the cost curve.
 
During FY17, BHP reported for strong financial and operational results with all operated assets free cash flow positive while a total free cash flow of US$12.6 billion was delivered. BHP used this cash to strengthen the balance sheet and produced a return of US$4.4 billion to shareholders. Higher commodity prices, strong operating performance and improved capital productivity helped the group encash on its performance. After finding oil at Shenzi North to the north of the operated Shenzi field in the US Gulf of Mexico in FY2016, they completed the nearby Caicos well in FY17 and also discovered oil. The Caicos well reached a total depth of 9,198 metres and encountered oil in multiple horizons. Following these positive results, they accelerated their Wildling appraisal well and oil was discovered in multiple horizons in August 2017. Drilling of the Scimitar prospect, to the north of the Neptune field, is planned for FY2018. Development in the Southern Mining Area is progressing well and is expected to support a gradual increase in copper production to 230 kilotonnes (kt) in FY2021. Through the first half of FY18, BHP’s Olympic Dam smelter operations will be enhanced through a total A$350 million investment.
 

Returns through performance (Source: Company Reports)
 
Stock performance: BHP stock rose 16.5% in last six months (as at December 06, 2017) but has edged lower this week owing to the commodity price movement. However, given the long-term potential, we put a “Buy” recommendation at the current market price of $27.14


BHP Daily Chart (Source: Thomson Reuters)
 

Rio Tinto Ltd(ASX: RIO)

RIO Details
 
High Returns to Shareholders: RIO has highlighted that its capital expenditure seems to be less than $4.5 billion in 2017 and has guided for a capex of $5.5 billion in 2018 and $6 billion in both 2019 and 2020. $1.9 billion of share buyback has also been slated for completion by the end of 2018. RIO is targeting $5 billion in additional free cash flow from its five-year productivity programme from 2017-2021. Rio and China’s Sinosteel Corporation have agreed to extend their historic Channar Mining Joint Venture which is one of the Australia’s most significant trading partnerships and has helped RIO pave the way for building a strong relationship with China.
 

Guidance (Source: Company Reports)
 
Stock performance: The stock has moved up 16.4% in last one year, as at December 06, 2017 and is trading at slightly high levels despite falling 6% in last one month. We believe that the stock is “Expensive” at the current market price of $69.46
 

RIO Daily Chart (Source: Thomson Reuters)
 

Fortescue Metals Group Ltd(ASX: FMG)

FMG Details
 
Significant Developments: Fortescue is continuing with its approach of providing training, employment and business development opportunities for Aboriginal people to ensure that communities benefit from the growth and development of Fortescue. In its Quarterly Production Report for Q1 FY18, 44.0 million shipments of iron ore were reported and cash production costs (C1) were lowered to a record US$12.15 per wet metric tonne (wmt), which was a slight reduction over the prior quarter.
 

Production Summary (Source: Company Reports)
 
Based on earlier market prices of the past few months, Fortescue had revised its FY18 price realisation guidance to 70-75 per cent of the Platts 62 CFR index. At present, the guidance may take a different note based on to-date commodity price volatility. In the longer term, as market conditions normalise, steel mills have been expected to reduce their cost base by using higher value-in-use iron ore.

Lately, FMG has appointed Kotug Australia Pty (KOTUG) as its towage services operator for the Port of Port Hedland and aims to work closely with the Pilbara Ports Authority to ensure a seamless transition to operational commencement in 2019.
 
Stock performance: In the last six months, FMG stock has slipped a bit and is also trading at low levels. However, we have a wait and watch approach on this one and look for any positive catalyst that can boost performance. We give an “Expensive” recommendation at thecurrent market price of $4.57
 

FMG Daily Chart (Source: Thomson Reuters)

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