Moody’s upgrades BHP Billiton’s outlook

Cost-cutting success and rising commodity prices have boosted the ratings agency’s view on BHP Billiton.

BHP slashed operating costs by around 16 per cent in fiscal 2016.

BHP Billiton’s successful cost-cutting drive and the sharp recent rise in the price of key commodities has encouraged ratings agency Moody’s to upgrade its outlook on the miner to ‘stable’.

The action represents a swift improvement in Moody’s view on the mining giant after it downgraded its credit rating two notches to A3 in March and slapped on a ‘negative’ outlook.

“The change in outlook to stable reflects our expectation that BHP Billiton will continue to see margin improvement and solid free cash flow generation over the next 12-to-18 months,” Moody’s vice president and Senior Credit Officer Matthew Moore, said.

“This improved earnings and cash flow generation will allow for its credit metrics to improve to levels more appropriate for the rating.”

The ratings agency pointed to the decision to scrap the progressive dividend policy early this year, ongoing actions to slash costs and lower capital expenditures as key reasons for the improved outlook.

BHP slashed operating costs by around 16 per cent in fiscal 2016 and is eyeing a further 12 per cent reduction in fiscal 2017.

Moody’s also noted the rapid run-up in the prices of several of BHP’s key commodities would greatly assist cashflow, with the rise in iron ore and coal prices singled out as particularly impressive.

Given the improving sector outlook and cost-cutting accomplishments, the ratings agency now foresees the miner’s leverage falling sharply through fiscal 2017 to levels comfortably in line with the current debt rating.

It is, however, cautious given the threat of ongoing volatility in commodity prices.

“BHP Billiton’s ratings continue to reflect the global strength of its metals and mining portfolio and its substantial product and geographic diversity, including a solid position in oil and gas,” Moody’s said.

“BHP Billiton’s ratings are balanced by the firm’s still-high gross leverage metrics reported for fiscal 2016 as well as the ongoing volatility and downside risk to commodity markets.

“While prices have run up significantly for many of the commodities produced, this recovery has in many cases reflected stimulus and regulatory changes in China and fund activity, which could reverse, leading to downside risk for demand and prices.”

The ratings also incorporate the risks associated with the tragic Samarco dam collapse last year as the remediation and compensation costs continue to add up.