BHP Billiton Limited downgrades iron ore guidance: Is it time to sell?

It could be another bumpy ride for BHP Billiton Limited (ASX:BHP) shareholders in 2016.

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Global mining giant BHP Billiton Limited (ASX: BHP) announced its production results for the first half of financial year 2016 (FY16) today, reporting a 4% increase in iron ore production to 118 million tonnes (Mt).

However, the miner was forced to cut its full-year production guidance by 10Mt to 237Mt as a result of the disaster at its Samarco project in Brazil, which forced the suspension of production.

Still, guidance for BHP’s Western Australia Iron Ore (WAIO) unit was left unchanged at 270Mt, despite operational issues late in the year, which the company said were offset by further improvements in productivity.

Furthermore, the company maintained production guidance for petroleum at 237 million barrels of oil equivalent (MMboe), although Onshore US assets are now expected to produce only 109 MMboe, down from previous guidance of 112 MMboe. Further details can be seen in the chart below:

Source: BHP Billiton
Source: BHP Billiton

More Impairments

Indeed, BHP Billiton was recently forced to undertake a US$7.2 billion impairment on its Onshore US assets as a result of “significant volatility and much weaker prices” in the oil market than had been anticipated. With oil prices languishing below US$29 a barrel, further impairments are possible across the sector with Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) also at risk.

BHP this morning also told investors to expect a further US$300 million to US$450 million in additional charges.

It said this relates to redundancies and rig terminations as well as the closure of its Crinum coal mine. This is together with inventory write-downs (a result of crashing commodity prices) and “global royalty and taxation matters”.

Commenting on the results, BHP’s CEO Andrew Mackenzie said: “Commodity prices fell substantially in the first half of the 2016 financial year putting pressure on the whole resources sector. We continue to cut costs and remain focused on safely improving our operational performance to enhance the resilience of our business.”

He added that: “In this environment, we are also committed to protecting our strong balance sheet so we have the financial flexibility to manage further volatility and take advantage of the expected recovery in copper and oil over the medium term.”

I added emphasis to his restated commitment to protecting BHP’s strong balance sheet because this could result in the scrapping of the company’s decade-long ‘progressive dividend’ policy. The recent plunge in commodity prices will take its toll on BHP’s financial performance, which could force it to reduce shareholder distributions in the very near future.

Time to Sell?

The headwinds facing BHP Billiton couldn’t be clearer. Although it maintains well-diversified operations, all of its key markets (iron ore, petroleum, copper and coal) are suffering from falling resources prices, with little hope of a recovery anytime soon, while China – BHP’s key market – is also growing at its slowest rate in a quarter of a century and trying to transition away from infrastructure growth.

Add in the prospect of weaker earnings and a slashed dividend yield, and the case is hardly compelling for BHP Billiton.

In saying that however, the share price has fallen to its lowest level in more than a decade as a reflection of these issues. While I still don’t believe BHP Billiton shares are a buy right now, investors still holding the shares may want to think twice before selling as well. Of course, there is always the possibility of further losses in the near-term, but the risk vs. reward payoff does seem to have improved.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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