BHP Billiton (BHP) has been one of the star performers since Brexit Friday (June 24, the day after the vote), rising 20% since that day's lows. More than 3% of that increase has come today, as the London-listed shares outperformed a sluggish FTSE 100.
You may be surprised by that if you read the CNBC headline (with a "Whoa" marker next to it): "World's largest mining firm records worst loss in its history." However, the market generally looks beyond such sensationalistic headlines, and BHP's full-year results (the company is on a June 30 fiscal year) featured $9.7 billion in write-downs on a pre-tax basis.
Companies always throw everything but the kitchen sink into annual results, which must be fully audited, and the market tends to look past those one-time charges, as it is clearly doing with BHP today.
I sit here and watch this market and say "what's left?" With all three U.S. indices at or within a smidgen of all-time highs, where's the beef? How do I make money?
I noted some short ideas in my column last Friday, but on the long side, you really have to be looking for companies that will benefit from an improvement in underlying fundamentals. In commodities names, that, of course, comes from an improvement in the value of the commodities themselves.
So, from BHP's perspective, things look a lot better on Aug. 17 than they did on June 23. Oil is "back" to $46 per WTI barrel, iron ore's "back" to $60 per ton, U.S. natural gas prices are "back" to $2.60/mmBtU and copper's "back" to $2.15 per pound.
Well, it's been a hell of a two-year period, because in August 2014 commodity prices were so much higher. In August 2014, oil was trading at over $90 per barrel, iron ore was trading at over $90 per ton, natural gas was trading between $3.75 and $4.00/mmBTU, and copper at over $3 per pound.
Compare those last two paragraphs and the percentage differences are just striking. So, this slight increase in pricing across the commodities spectrum since the Brexit Turnaround is really just a drop in the bucket. We're still at near-cycle lows in commodity pricing, and for a miner those lower realizations mean lower profits.
BHP noted that "price" (their measurement) cost the firm $10.7 billion in EBITDA in the fiscal year ended June 30. Since BHP's overall EBITDA was $12.3 billion for this fiscal year, down $9.6 billion year-on-year, one can see that lower commodity prices accounted for more than 100% of BHP's profit declines for the year.
As those trends reverse -- as they have in the seven weeks since the June quarter ended -- BHP's profits will increase proportionally, especially since cost-cutting (all exploration companies are doing this) effectively lowers BHP's breakeven cost per barrel, ton, BTU, etc.
So, BHP's one to hold onto here, and I don't think it's too late to initiate new positions.