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BHP Billiton: Things to watch for in 2014

Although shares in BHP Billiton (ASX: BHP) recovered significantly in the latter half of 2013, it was still a disappointing 12 months for shareholders who recognised just a 1% gain for the year – largely outpaced by the broader S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) near 15% return.

As has been the case with the other miners, including Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG), BHP has suffered as the confidence of investors in the sector has declined in recent years. Signs of slowing growth in China and other parts of Asia has resulted in fears of declining demand for commodities such as iron ore, while at the same time each of the miners have ramped up their production levels.

However, things now seem to be looking up for the miners. The price of iron ore remains resilient and China looks set to continue growing strongly, even though that rate of growth might not be quite as strong as it was. Here are four things about BHP that investors should watch out for in 2014:

  1. The future of BHP’s aluminium, manganese and nickel businesses all remain uncertain, and the miner could look to offload these assets as it aims to focus on its “four pillar” strategy which includes iron ore, copper, petroleum and coal assets. However, while none of the former three commodities are expected to recover in the coming year, it may be difficult to offload these assets. This could weigh down overall group earnings.
  2. The company cut its controllable cash costs by US$2.7 billion in 2013, but plans to continue cutting them even further. The miner’s CEO, Andrew Mackenzie, recently said: “A 25 per cent reduction in capital and exploration expenditure is planned for this financial year and our level of investment will decline again next year.” This will help boost profits and should result in an increase in dividend distributions.
  3. BHP has committed to spending US$2.6 billion on its Jansen Potash project over the next few years. Given the expanding global population and China’s growing middle class, the fertiliser ingredient could very well become the miner’s ‘fifth pillar’. Investors should listen out for the progress being made on the mine.
  4. The high Australian dollar has restricted BHP’s earnings in recent years. It has been trading above parity with the US greenback for much of the last two or three years, but has now fallen back to around US88.65c. A lower Australian dollar will significantly help drive profits upwards.

Foolish takeaway

Of all the large miners, BHP is the safest bet due to its high level of diversity. It is not as susceptible to a fall in price of iron ore as companies including Rio Tinto, Fortescue or BC Iron (ASX: BCI) are. However, the sector remains volatile and investors may look for safer alternatives.

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

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