Goldman Sachs trims target price on BHP Billiton

BHP Billiton’s decision to increase copper production in fiscal year 2016 and lower its cost guidance are symptomatic of some of the factors that are ailing the wider copper mining industry, as firms add tonnes in a bid to lower their unit costs, adding to the existing oversupply, Goldman Sachs said.

The miner increased its guidance for copper production in fiscal year 2016 to approximately 1.55mt from 1.5mt and projected about a 20% reduction in group costs, the broker said following the start of a copper briefing and tour of BHP’s Chilean operations which started on 1 December.

However, whereas cost reductions and weaker producer country currencies should see the cost curve flatten and marginal costs fall – and hence prices too – BHP Billiton in fact guided towards higher costs at Escondida for fiscal year 2016.

Management now expected costs of $1.21 per pound, up from $1.18 per pound previously – despite a weaker Chilean peso.

While that may just be a function of the company being conservative, it was a “slight negative”, analysts Eugene King, Craig Sainsbury and Christopher Jost said in a research note sent to clients.

The third factor underpinning Goldman’s ‘bearish’ view on copper was that the current deflationary environment would help growth projects remain on track as the necessary outlays on investment dropped.

Goldman Sachs trimmed its twelve month target price on the stock to 925p from 950p previously, while staying ‘neutral’ on the shares.