Jefferies Downgrades BHP, Joins Argus In 'Hold' Club

Jefferies’ Christopher LaFemina downgraded the rating for BHP Billiton Limited (ADR) BHP from Buy to Hold, saying that BHP’s shares continue to trade above the price target of $24.

Improved mining sentiment had resulted in a biggest six-week rally in mining stocks in more than 30 years. The FTSE Mining Index gained 70 percent during the January 20 to March 7.

Analyst Christopher LaFemina pointed out that commodity prices had increased with iron-ore up 46 percent, oil up 9 percent and copper up 6 percent year-to-date. These commodities constitute 90 percent of BHP’s NPV.

Commodity Price Recovery Unlikely To Sustain

LaFemina believes that while the Chinese demand outlook is slightly better than two months ago and more metals-intensive stimulus may be coming, most commodity prices will go lower in the near term.

The analyst expects the recent strength in the prices of iron ore, copper and other mined commodities to at least partially reverse over the next three to six months due to increased supplies. He wrote, “Based on our commodity price forecasts rather than current, higher spot prices, BHP's valuation is stretched.”

LaFemina expressed concern regarding BHP’s recently announced strategic overhaul, which includes major changes to divisional management and a regrouping of segments. The company should use its cash flows to pay down debt rather than acquire assets in copper and oil segments.