HSBC downgrades BHP Billiton to 'reduce'

HSBC downgraded BHP Billiton to ‘reduce’ from ‘hold’ and cut the price target to 590p from 1,100p saying the company faces further headwinds from oil and iron ore.

The bank said it assumes a 50% dividend cut and eliminates most non-essential capex, which leaves BHP around $2bn cash destructive post dividend over calendar year 2016.

“We think the Samarco incident fallout (we assume $3.5bn fines) will continue to weigh, limiting rationale for a ‘premium’ valuation,” said HSBC, noting that the stock screens as expensive and iron ore spot has significant downside risk.

HSBC said that while an equity issue could be a way to secure extra funds, the market is likely to be super critical of the asset quality and price tag.

More generally, the bank said it expects seasonal weakness in the first quarter to maintain pressure on commodities.

Base metals may stabilise towards mid-year with supply-side cuts and China policy action, it said.

It added that while weak producer currencies offer some support, continued renminbi weakening has negative commodity read-across.

At 1032 GMT, BHP shares were down 2.1% to 622.80p.