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Poor year for BHP

Following a decade of strong shareholder returns and soaring growth, it has been a year to forget for mining heavyweight BHP Billiton (ASX: BHP), which finished the year with just a 2.1% gain compared to the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) 17% increase.

The mining industry acted as a drag on the broader market as commodity prices and global demand diminished. In addition, supply of resources increased significantly and the high Australian dollar took its toll on profits. Here is a short summary of BHP’s year.

New management

Weeks after its competitor Rio Tinto (ASX: RIO) removed chief executive Tom Albanese from office, BHP also removed Marius Kloppers to make way for Andrew Mackenzie. Under Mackenzie, the company’s new focus has been on cutting costs significantly, reducing capital expenditures and ridding itself of non-core assets.

New focus

Recognising the end of the mining boom, Mackenzie announced his intentions to cut costs from a peak of around $22 billion to $18 billion by the end of 2014 (with further cuts thereafter). Meanwhile, non-core assets are being sold off in order to focus only on more profitable projects and free up cash to increase shareholder returns. These factors were seen as necessary to ensure a sustainable future for the company.

Through the year, BHP closed two coking coal mines, sold a 15% stake in its Jimblebar mining complex for $1.5 billion and currently trades on a dividend yield of 3.5%. Whilst 3.5% may be attractive for a company with enormous growth potential, it certainly doesn’t compare to other blue chips. Furthermore, although it finished for the year having increased 2.1%, it has diminished significantly in value since its high of $39.34 in February. Faltering demand and poor growth data from countries such as China have heavily impacted the market’s expectations on the miner.

Prospects

Tyndall Asset Management, which is a shareholder of both Rio and BHP, has outlined the two companies as “good value” for longer-term shareholders, but certainly not for immediate returns. Whilst this may be the case, it certainly seems as though the share prices will continue to fall before any significant gains can be made.

For instance, some experts are predicting that spot iron ore, which is currently priced around US$110 to US$120 per tonne, could fall below US$100 in the third quarter. Meanwhile, coking coal’s price has also been hit hard. The falling commodity prices will take their toll on BHP’s profits.

Foolish takeaway

The fall in share prices of Australia’s miners reflect the belief that the mining boom is well and truly over. Although they could potentially hold good long-term prospects, commodity prices are expected to fall significantly lower and should drag the miners along for the ride.

Instead, The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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