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Should you buy BHP Billiton Limited for capital growth in 2018?

Credit: Lucas Walters

Over the last couple of years tumbling commodity prices, a cultural shift towards environmentalism, and a focus on clean energy sources have all contrived to suck the life out of the mining industry.

Big miners like BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), once the lifeblood of the Australian economy, were increasingly seen as the black sheep of the market, and were dumped from socially-conscious investors’ portfolios.

However, it finally seems like the mining sector is benefiting from some market optimism for the first time in years. And there are several positive indicators coming out of BHP in particular.

BHP’s share price had a strong start to 2018. Since hitting a floor of $14.15 back in January 2016 it has more than doubled in price to now reach new multi-year highs.

And in Tuesday trading it crossed the psychological barrier of $30 for the first time since South32 was spun off from BHP in May 2015.

In a positive sign for the mining sector, UBS analysts recently upgraded their price estimates for iron ore, hard coking coal and thermal coal in each of the next three years. They also increased their forecast for BHP’s FY18 NPAT from US$8.2 billion to US$9.52 billion on the back of the upgrade.

It should be mentioned that BHP’s commitment to provide an extra $235 million to support clean-up efforts at the Samarco iron ore mine in Brazil might dampen that forecast.

Analysts from Morningstar, on the other hand, are more bearish on commodity prices. They believe the rise in prices that drove up stocks in the industrials and mining sectors towards the end of 2017 was only a cyclical upturn, and that underlying demand from China for steel and iron ore will still tend to decrease over the next 10 years.

But BHP also has another possible ace up its sleeve for 2018. It has reportedly entered into talks with a number of investment banks to discuss the possible sale or spin-off of its US shale oil and gas assets.

Either alternative could provide upside for existing BHP shareholders.

The assets could be worth around US$10 billion, which would provide a much needed cash injection and unburden BHP’s balance sheet of its underperforming shale business. The sale may even result in a special dividend for shareholders.

A spin off also has its perks.

When South32 Ltd (ASX: S32) spun off from BHP, shareholders received one share in the newly created child company for every share they held in the parent. And despite some teething problems over the first 12 months, shares in South32 are now up 71% on their listing price, reaching $3.65 at close of trading on Friday afternoon.

Spin offs can often benefit the child company as it means a more focussed management team and increased access to capital. It also gives investors greater transparency over the company’s financials, which would have previously been buried somewhere in the parent’s results.

BHP bought its US shale assets earlier this decade when oil prices were booming. However, these acquisitions didn’t seem too clever after the global prices of both crude oil and natural gas hit multi-year lows in 2016.

Since then the prices of both oil and gas have steadied, and BHP obviously thinks now could be the right time to divest from these interests.

BHP has also shown that it is taking heed of paradigm shifts in the popular view of fossil fuels as a viable source of energy for the future. The company recently announced that it would withdraw from the World Coal Association (WCA), and was considering leaving the Minerals Council of Australia (MCA), due to differences in their views on climate change and energy policy.

BHP has accused the MCA group in particular of lobbying for technology and energy targets that supported coal-fired power to the detriment of other energy sources. This apparently contravenes BHP’s stated position as being neutral in its approach to tech and energy.

Foolish takeaway

There are legitimate reasons to get excited about BHP’s prospects for 2018, and its stock could provide some short-term growth potential for investors. Plus the spin-off or sale of its shale assets could have some interesting consequences for its shareholders.

But depending on your ethical position, an investment in the world’s biggest miner may still not be right for you or your portfolio.

BHP’s recent stance against the WCA and MCA doesn’t mean that it is moving out of coal mining entirely, and the environmental consequences of its business is still worth taking into account.

For socially conscious investors still seeking some exposure to the mining and industrials sectors, an investment in one of the lithium miners like Orocobre Limited (ASX: ORE) or Galaxy Resources Limited (ASX: GXY) might provide more long-term growth opportunities without some of the guilt from supporting the fossil fuel industry.

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Motley Fool contributor Rhys Brock owns shares of Galaxy Resources Limited. 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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