Citigroup upgrades BHP Billiton but says capex and dividend cuts needed

Citigroup upgraded BHP Billiton to ‘buy’ from ‘neutral’ following the steep fall in the share price and despite downgrades to iron ore and gas prices.

The bank said there are still risks, from the fallout of the Samarco dam burst and volatile commodity prices, “but board/management need to act boldly to stave off these risks by cutting the dividend and capex as we've done in our forecasts to prevent issues snowballing and putting the balance sheet at risk”.

"In a rapidly changing environment where commodity prices are under severe pressure, the question is can BHP cut capex fast enough due to the lead time on projects to offset the cash drain that would occur?”

Withing the same report, the Citi analysts said they had cut their medium-term iron ore price forecast of $40/t to $35/t, driven by cost deflation and an increasingly financialised market. They pointed to declining Chinese steel production and increasing low-cost supply putting pressure on iron prices.

Despite its commodity price downgrades, Citi said BHP still generates more than $10bn a year in operating cash flow.

Citi also halved its dividend forecasts to a sustainable but still attractive yield of around 6% and reduced its estimates for the miner's capital expenditures to $5bn by full year 2018, which it said was more than enough to balance the budget even at spot.

The broker's price target for BHP came down from 850p to 750p.

At 1533 GMT, BHP shares were up 6.4% to 659.40p.