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Why I think BHP Billiton Limited (ASX:BHP) shares are racing to a new 4-year high

The share price of BHP Billiton Limited (ASX: BHP) is leading the rebound in mining stocks today after the Big Australian posted its full year production report.

The stock jumped 3.1% in morning trade to hit $33.51 while fellow miners like Rio Tinto Limited (ASX: RIO) and South32 Ltd (ASX: S32) are up around 1% to 1.5%.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is lagging with a 0.8% increase.

Investors are particularly excited as BHP surprised the market by producing more iron ore than analysts were expecting. The miner delivered a very impressive 10% increase in iron ore production in the June quarter over the previous quarter to hit 64 million tonnes.

What this means is that BHP has beaten its full year production target of the steel making ingredient as it dug up 275 million tonnes of the commodity, which is above its April revised guidance of 272 million to 274 million tonnes.

The other thing worth noting is that BHP has the capability of hitting the 290 million tonnes of ore a year goal if you extrapolated the latest quarterly production number, although investors may need to wait a little as the world’s biggest miner by market cap is in no rush to get there.

Management is aiming to produce between 273 million and 283 million tonnes of iron ore in FY19, which may not be a bad thing given that its peers Rio Tinto and Vale S.A. have reported big increases in production.

The increase in supply could weigh on the price of the commodity and that won’t be in any miner’s favour, although the bigger production figures from the three iron ore powerhouses are bad news for Fortescue Metals Group Limited (ASX: FMG) (click here to see why).

It’s a good outcome for the sector that BHP is taking a more cautious approach to ramping up production of the ore as its more diversified business leaves it in the best place to be the least aggressive producer compared to Rio Tinto and Vale, who are more reliant on sales of iron ore to meet shareholders’ expectations.

On that note, investors will also be excited about BHP’s petroleum output, which hit 192 million barrels of oil equivalent (MMboe) in the last financial year ended June 30. This is ahead of expectations that the miner will top out at 190 MMboe for the year.

Investors will also be happy with BHP’s figures for coal and copper. This latest update will reinforce the view that the Big Australian is flushed with cash, particularly given that management has hinted that a deal to sell its onshore unconventional oil and gas assets in the US is on hand.

BHP said it will announce the result of the sales process in the coming months with the view of completing the divestment this calendar year.

Investors can take this as further confirmation that BHP has managed to get an offer that’s at least US$10 billion as that is the benchmark it had set for itself.

With all this good news, it was easy to overlook the US$440 million provision it had to set aside to settle the Samarco mine disaster.

BHP is one of my top picks for the year and I believe it will soon break above May’s four-year high of $34.44.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. 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 Scott Phillips.

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