BHP Billiton PLC was downgraded at RBC Capital Markets as a result of its challenging cash flow outlook and doubts about the South32 spinoff.
Analyst Timothy Huff lowered his rating on the stock to underperform from sector perform and cut his price target to £1,500 from £1,800.
He noted that BHP has underperformed its mining sector peers in the past six months as investors price in potential structural changes in the oil and iron ore markets.
Despite having a neutral view on BHP’s US$13-billion capex commitment, its “Four Pillar” strategy to focus on iron ore, copper, coal and oil, as well as the planned spinoff of its aluminum, nickel, silver and coal divisions, Mr. Huff believes the timing of this market transition is difficult.
“We think this could be a case of ‘Good idea, bad timing,’ and question BHP’s financial flexibility in the coming years,” he said.
The analyst noted that BHP’s dividend costs the company US$6.5-billion, maintenance capex runs another US$9.5-billion, and additional growth capex is a further US$3-billion to US$4-billion.
In total, he estimates the company needs US$16-billion to US$20-billion in operating cash flow just to cover its capex and dividend requirements.
“On RBC forecasts, BHP will generate just enough to cover both of these needs,” Mr. Huff told clients. “However, on spot price forecasts, BHP only generates enough to cover maintenance capex and the dividend.”