Mining sector attractive for growth seekers
As BHP Billiton reports record production levels, Helal Miah, investment research analyst at The Share Centre, gives his insight into the sector and explains why he recommends investors ‘buy' BHP Billiton.
"BHP Billiton reported positive full year production numbers this morning and investors will be pleased to hear an overall bullish statement from the miner despite the weaknesses in the sector at the moment.
"The miner announced record iron ore production levels from its Western Australia operations, with total production of 170m tonnes, up 7%. Record production levels of copper were also reported, up 10% to 1.2m tonnes, surpassing previous guidance. These figures were helped by past investments in capacity expansions and a rise in the grades of copper mined at Escondida.
"While these figures are very good at the individual company level, they highlight part of the reason why commodity prices are so weak. Rio Tinto also reported good production levels in its Q2 results yesterday and past levels of investments by these large diversified miners have increased production capacity and supply. However, the key customer, China, has not increased its levels of demand in-line with the increased supply and therefore prices remain weak.
"The Share Centre's Profit Watch UK data highlights these issues showing that last year's revenues in the mining sector were up by about 5%, helped by increased production levels. However, net profits fell by about 76% as a result of weak prices, investments in capacity and asset write downs.
"While these issues still remain and we expect to see a few more write downs, we believe there is an opportunity for the longer term investor. There is good value to be had at these lower prices, especially in the larger more diversified miners, and growth opportunity is pinned on hopes of global economic recovery led by the US and China. We recommend investors ‘buy' BHP Billiton and believe the miner is in a good position to grow its profits as this recovery happens."