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BHP Can Overcome Any Obstacle

NEW YORK (TheStreet) -- Investors can usually bank on operations, and in the mining game, operations count.

BHP Billiton (BHP) showed strong operational performance last year.In the first half of fiscal 2014, its profit increased 31% year over year. The company's good performance resulted from a disciplined approach in capital allocation, spending primarily in the higher-margin regions.

BHP has 19 projects in the execution stage. Most of them are expected to deliver their first production before the end of its 2015 fiscal year, with subsequent improved production in volume and revenue. BHP and peers Rio Tinto (RIO) and Fortescue Metal Group (FSUGY) are increasing iron production in the Pilbara region of western Austraila. BHP is increasing the annual production capacity of its Jimblebar mine there to 35 million metric tons by the end of 2015. The mine will increase its annual iron ore production capacity to 220 million metric tons.

Significant growth in supply, including similar increased production from Rio and Fortescue, will exceed the amount of global iron ore demand in total, in turn bringing iron ore prices down.

Still, even if prices fall, incremental production in the Pilbara region will benefit the company. BHP's earnings before interest and tax from the region are about 57%. Therefore, with additional iron ore production from the region, BHP can sell an increased volume at a higher margin.

Positive long-term fundamentals for the U.S. shale gas business

BHP is concentrating on developing its liquid-rich areas to meet expectations of increased demand. To meet the growing demand, BHP plans to allocate 75% of its fiscal year 2014's $3.9 billion spending budget for the U.S. onshore business to shale liquid-rich acreage like the Black Hawk area of the Eagle Ford region in Texas.

In the first half of fiscal year 2014, BHP's liquid production from its U.S. onshore assets increased about 72%, and for the calendar year, total liquid production from the region is expected to increase 75%.

Focus on productivity will return value to investors

As the company increases production at its existing facilities, it helps lower its cash cost per unit. In fiscal year 2013, BHP reduced its cash cost by about $2.7 billion, and cumulative savings increased to $4.9 billion in the first half of fiscal year 2014. By end of the second half of fiscal year 2014, the company expects to increase saving by another $600 million, reaching $5.5 billion.

Along with productivity gains, the company is reducing its capital spending. With most of its ongoing projects set to deliver their first production, BHP's capital expenditure for fiscal year 2014 is expected to drop by 25% year over year to $16.1 billion, and it is expected to decline further in 2015.

BHP is showing good operational performance at the same time as it's cutting its costs. The company may also increase its dividend or opt for share buying in the near future. These indicators make it a profitable buy for any investor.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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