3 reasons to sell BHP Billiton Limited, 1 reason to buy

BHP Billiton Limited (ASX: BHP) has disappointed investors with its September quarterly report, with the share price down 1.0% at $22.41 in lunchtime trading.

Analysts had expected declines in production of petroleum, steaming coal and copper and they were confirmed, but copper production was lower than anticipated. BHP was forced to shut down its giant Olympic Dam mine in South Australia after power outages, resulting in production falling 26%.

Petroleum production was 55 million barrels of oil equivalent – down 15% on September 2015 quarter. Copper was down 6% to 355 kilotonnes and energy (steaming) coal was down 4% to 7 million tonnes. Iron ore production was flat at 58 million tonnes while metallurgical coal was up 1% to 11 million tonnes.

Despite the power outage issue, the resources giant has left its production and cost guidance for the 2017 financial year (FY17) unchanged.

Here are three reasons why investors might want to sell out of the miner.

The recovery has already been priced into BHP’s shares. The time to buy BHP’s shares was when they hit $14.06 in mid-January 2016. Since then, a ~60% recovery in the share price came from big recoveries in iron ore and oil prices – the miner’s two primary commodities. It’s unlikely that iron ore and oil prices will advance in the near future as much as they have over the past nine months.

BHP is likely to miss its production guidance for copper. After guiding to 1.7 million tonnes of copper in FY17, the issues at Olympic Dam and repairs at its Cerro Colorado mine in Chile will see the company struggle to lift production over the rest of the financial year.

Higher commodity prices may only be temporary. While coal prices have soared (coking coal is at US$232.60 a tonne according to Bloomberg), those factors may be short-lived. The stable iron ore price could sink if China’s steel industry slows production and exports as some analysts expect. BHP could also see iron ore production fall in the short-term due to planned maintenance on its rail network.

Here’s one reason why investors might want to consider topping up.

Many commodities are at multi-year lows – including copper. After a few tough years of slashing costs and making its operations as efficient as possible, BHP is primed for any recovery in commodity prices over the long term.

Foolish takeaway

Now that a sensible dividend policy has been adopted, shareholders will be rewarded with higher dividends when the miner performs well, and lower dividends when the miner needs to retain more capital during the tough times. That could see the current yield of 1.8% rise rapidly if commodities prices rise.

3 More shares you might want to sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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