The mining pullback you hear about a lot in the media may have a silver lining for investors. Nothing focuses attention and effort more than a downturn in profits and it doesn't spare big companies either.
BHP Billiton Limited (ASX: BHP), the largest ASX listed company and big miner, has benefited greatly from the surge in Chinese iron ore, copper and coal imports over the past four years.
Yet as revenues were up, annual net profits almost halved since 2011. After hitting a peak in share price around $50 three years ago, it sank to about $30 several times before reaching its current $37.75.
Changes are in play to make the company stronger, more profitable and streamlined. Restructuring like this usually occurs near industry cycle bottoms. The outlook could improve quite well from here, so investors should know why.
Potential sale of assets or de-merger
As the company narrows down its segments to the four "pillars" of iron ore, coal, petroleum and copper, it is now considering selling off assets and businesses that are holding back its earnings and returns performance. There is a possibility that it could create a de-merger worth up to $20 billion.
In either case, it could free up capital, raise net profits and allow for more future acquisitions of higher profit margin projects.
Petroleum and gas ventures expanding
After iron ore, petroleum contributed the largest percentage increase to group production growth. Its US onshore oil production rose 72% during the first half of FY2014, adding to the total petroleum increase of 9%. The miner is better diversified by this growing energy segment, which helps to offset the mining downturn.
Iron ore prices and demand for coking coal
The sustained strength of iron ore spot prices will help keep earnings higher. China is pulling back from heavy industry and infrastructure investment, but the population is urbanising rapidly, so the need of materials for buildings, roads, railways and urban areas will steadily grow. To make steel, you need coking coal as well, so demand should grow proportionately.
Capital return
One last benefit of these improvements is the company plans to implement a capital return to shareholders, which could come as increased dividends or a share buyback. Nothing has been announced in detail, but patient shareholders will find out in time.
Foolish takeaway
Restructuring isn't easy, but investors have time to assess how the changes are occurring and don't need to rush in hastily.
