BHP Billiton share price: Company replaces rival Rio as Citi’s preferred mining stock

BHP Billiton Plc (LON:BLT) has replaced arch-rival Rio Tinto as the preferred mining stock of US investment giant Citigroup, as the bank upgraded the Melbourne-based miner to “buy” and raised its price target to A$18 (870p).

Citi said the move was prompted by BHP’s recent underperformance, as the Samarco disaster and weak oil price sent its stock deeper in the red than rivals.

"We switch to preferring BHP over Rio given our bearish iron ore view and 20 percent underperformance over the last six months," the bank said in a note.

Citi urged BHP to “act boldly” in the face of risks to its capital position by cutting the dividend and capex.

"We have halved our dividend forecasts to a sustainable but still attractive yield of about six percent and reduced capex to $5 billion by FY18, more than enough to balance the budget even at spot,” Citi noted.

In contrast, earlier this week Barclays said that BHP cannot "sustainably cut its capex and cost levels to accommodate significantly lower levels of cash from operations", and also suggested the dividend will be halved. The British bank cut BHP’s rating to “underweight” and slashed its price target in half to 515p.

“Our commodity price changes have left the company generating very little earnings per share on our forecasts on a calendarised basis for 2016, while earnings and FCF are negative on spot,” Barclays analysts said. “In particular the stock is trading on a 6.5 percent dividend yield assuming a 50 percent cut in the dividend implying the equity has not fully priced in the cut.”

HSBC also cut its rating on BHP to “reduce” from “hold” and forecast that the miner is likely to halve its shareholder payout.

BHP will announce its capex and dividend targets when it delivers its half-year report on February 23.

BHP’s share price opened Thursday’s session in London on the upside, having added 1.34 percent to 627.90p as of 08:16 GMT. However, the mining stock is down more than 16 percent so far this year, after dropping some 45 percent in 2015.