BHP Billiton Bears at Five-Year Low on Profit Outlook: Options
Bearish wagers on BHP Billiton Ltd. (BHP) fell to the lowest in more than five years amid optimism that assets sales and spending cuts at the world’s largest mining firm will boost profit as global economic growth accelerates.
Puts protecting against a 10 percent decline in American Depositary Receipts of BHP cost 2.95 points more than calls betting on a 10 percent advance, according to three-month data compiled by Bloomberg. The price relationship known as skew sank to the lowest since September 2008 on Jan. 14. The ADRs fell 13 percent last year compared with a 30 percent surge on the Standard & Poor’s 500 Index.
BHP slashed spending and sold about $6.5 billion of assets in the past 1 1/2 years to bolster earnings as more than $60 billion of writedowns in the industry mounted after a decade-long mining boom peaked. The Melbourne-based miner’s profit will jump 28 percent in the year through June 2014, the biggest increase in three years, even as growth in China decelerates, according to analyst estimates compiled by Bloomberg.
“There’s good value in this sector,” Nader Naeimi, who helps oversee $131 billion as a Sydney-based money manager at AMP Capital Investors, said by phone. “The biggest miners have got a lot of cash. Global growth is showing signs of becoming more self-sustaining and so you’d expect commodities prices and resources companies to benefit.”
Iron ore prices rebounded 11 percent from last year’s lowest level in May, according to The Steel Index Ltd. Iron ore sales contributed 31 percent of BHP’s revenue last fiscal year.
Even with a slowdown in growth in China, BHP’s biggest customer, the economy is forecast to expand 7.4 percent this year and 7.2 percent in 2015, according to the median of economist estimates surveyed by Bloomberg. That compares with growth predictions of 2.1 percent this year for the Group of 10 nations and 2.2 percent in the following period. BHP gets 29 percent of sales in China.
Traders hold more bullish options on BHP ADRs than bearish ones, with the put-to-call ratio dropping to 0.709 on Jan. 21, the least in five years, according to data compiled by Bloomberg. Call open interest totaled 38,838 on Jan. 29 compared with approximately 29,896 for puts, the data show.
Implied volatility for BHP contracts 10 percent below the stock price has risen 0.5 percent this year to 24.3, three-month data compiled by Bloomberg show. The measure has climbed 5.7 percent to 21.4 for calls 10 percent above during the period. Skew, or the difference between put and call implied volatility, is 39 percent below its one-year average.
Eleanor Nichols, a Melbourne-based BHP spokeswoman, declined to comment on trading of the company’s options. BHP ADRs fell 5.7 percent this year, compared with a 2.9 percent decline on the S&P 500.
“Clients are turning back to these stocks that have underperformed,” Toby Lawson, head of futures, options and cash equities trading for Asia Pacific at Newedge Group SA in Sydney, said by phone.
Each ADR is worth two of the miner’s Sydney-listed shares. The Australian dollar has slipped 1.4 percent against the greenback this year.
BHP’s capital and exploration expenses for fiscal 2014 will be $16.1 billion, compared with $22 billion last year, BHP said Jan. 22. The company received $2.2 billion from asset sales during the December half.
“Our productivity agenda is in full swing and we expect to carry strong momentum into the second half of the financial year,” BHP Chief Executive Officer Andrew Mackenzie said in a statement that day. “This strategy leaves us well positioned to deliver a substantial increase in free cash flow and higher returns to shareholders.”
BHP will boost net income to $13.9 billion in the 2014 financial year from $10.9 billion last year, according to the average of 18 analyst estimates compiled by Bloomberg. The company will keep divesting assets after sales worth about $6.5 billion over the past 18 months, according to Heath Jansen, a London-based analyst at Citigroup Inc., who advises buying the stock.
The miner’s shares fell 0.5 percent in Sydney yesterday as data showed a contraction in Chinese manufacturing that threatens to undermine growth in the world’s second-biggest economy, crimping demand for commodities. A Purchasing Managers’ Index slid to 49.5 from 50.5 in December, HSBC Holdings Plc and Markit Economics said in a statement. A reading below 50 indicates a contraction. Results of the equivalent government survey will be released on Feb. 1.
“The growth momentum in China is already softening,” Yao Wei, a Hong Kong-based China economist at Societe Generale SA, France’s second-largest bank, said in an e-mail Jan. 29. “There will be more growth deceleration in 2014.”
Among the 10 most-owned BHP contracts, seven were bullish, with February $70 calls having the biggest open interest. The stock climbed 1.2 percent to $64.29 yesterday. The ADRs trade for 12.4 times estimated earnings, compared with 12.7 times for the Bloomberg World Mining Index of companies worth $970 billion, according to data compiled by Bloomberg.
“Market sentiment towards these companies is pretty strong,” Mark Lister, head of private wealth research at Craigs Investment Partners Ltd. in Tauranga, New Zealand, said by phone. “They are more focused now on getting a return on their investments and delivering shareholder value more than they were a few years back. They seem to be acting a lot more sensibly with their capital and we expect that to continue, shelving projects that don’t make sense in this environment and selling off assets where they need to.”
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