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The stock picker’s guide to BHP Billiton Limited in 2014

It’s been a rollercoaster ride for shareholders of BHP Billiton Limited (ASX: BHP) over the last few years, as signs have emerged of a slowing Chinese economy and falling demand for key commodities. While shares recovered in the second-half of 2013, the company still heavily underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) as well as many of Australia’s other blue-chip stocks.

However, many analysts expect BHP to have a stellar year in 2014. What are some of the factors that investors should be looking out for?

Where will commodity prices go?

While a number of key commodities may have remained resilient in 2013, as Chinese demand remained much stronger than expected, it is anyone’s guess as to where they will go this year. For instance, some analysts predict that iron ore will fall to the US$100 a tonne mark, while others forecast it to maintain an average price tag of $US130 a tonne throughout the year.

Like with any miner, BHP’s profits heavily rely upon stronger commodity prices. BHP is the most diversified of the miners, so its risks are more spread out than other miners, but a heavy fall in any commodity prices would likely impact share prices.

Record production

The company recently released its half-year production update which confirmed that the miner is producing at record levels. It achieved a 6% increase in copper production to 843,000 tonnes, compared to the prior corresponding period (pcp), as well as a 9% increase in petroleum liquids production to 50 million barrels of oil equivalent (which was underpinned by a 72% increase at Onshore US).

Although the figure wasn’t quite what the market had been hoping for, BHP also announced that it had produced 48.9 million tonnes of iron ore for the December quarter – an increase of 16% year-on-year. Like others in the industry such as Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) or BC Iron Limited (ASX: BCI), BHP is ramping up production levels of its core activities which include iron ore, copper, petroleum and coal.

Cost cutting

One of BHP’s primary focuses under CEO Andrew Mackenzie is to reduce operating costs and increase productivity levels. So far, it has reduced costs substantially, but investors should watch to ensure this continues. Key commodities are expected to fall in the long-term and profitability will be affected if costs are not reduced.

Potash

BHP is investing US$2.6 billion in its Jansen project over the next few years to continue its gradual push into the potash industry. Potash is a key fertiliser ingredient and as the global population continues to grow, BHP believes demand will soar. In fact, potash could well become the company’s ‘fifth pillar’ in the years to come.

While excavation of the production and service shafts of the Canadian Jansen project paused in the December quarter, it is expected it will be continued as of February. The project remains on schedule and to budget.

Shareholder returns

Shareholders have been applying significant pressure on companies in the mining sector to increase shareholder returns after years of poor share performances. BHP has indicated that it will look at capital management action once its net debt level falls below the US$25 billion mark.

The company recognised US$6.5 billion in proceeds from six transactions in 2013 and more are likely to occur this year as the miner looks set to sell its nickel and aluminium businesses. This could well push the company’s net debt level below the required US$25 billion mark, which could well result in a share buyback program. Furthermore, we will also likely see BHP increase its dividend distribution amount in 2014.

Foolish takeaway

BHP Billiton will release its interim results on February 18. Shares are currently trading at just under $36.50 each.

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

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