2016 in review: BHP Billiton plc

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BHP Billiton mine

This has been a blockbuster year for mining stocks, with the sector surging in style after a disastrous 2015 and nightmare start to 2016. Mining giants Anglo American and Glencore turned into unlikely three- and two-baggers respectively, making them the biggest winners on the FTSE 100, as the entire sector lifted itself out of the pit of despair.

A good year for the miners

BHP Billiton(LSE: BLT) was the third best performer on the index, rising 78%, according to research by Hargreaves Lansdown, closely followed by Fresnillo and Rio Tinto. It was an astonishing turnaround, but the scale of the sell-off had been equally stunning.

At the end of January, BHP Billiton was down 75% from its all-time high and yielding an astonishing 9.8%. Investors who bought the stock anticipating double-digit income will have been disappointed, because in February the company slashed its dividend by 75%, the first cut in 18 years, as first-half profits tumbled by a 92%. Today, it yields just 1.9%.

Lifecycles

Commodity stocks are notoriously cyclical, and it's tempting to claim this was just another turn of the investment wheel of fortune. BHP Billiton had just become too cheap, attracting buyers once sentiment turned. Miners also benefitted from improving sentiment in China, as the authorities encouraged yet more stimulus in a bid to propel the debt-funded boom for another 18 months.

But BHP Billiton and the other miners deserve a good deal of the credit for overhauling their operations, slashing costs, reducing capex and disposing of non-core assets. This will help them pay down debt, strengthen balance sheets and return to profitability.

Be bold, buy BHP

Looking back at Fool articles written at the height of January and February's carnage, it's good to see so many writers encouraging investors to be bold and buy BHP Billiton. I hope you listened because I didn't, gloomily predicting the end of the commodity super-cycle instead, and missed out on all the fun. I was a happy commodity bear in 2014 (when I sold BHP) but out of sorts this year.

BHP Billiton's five-year share price slide from £25 to £5 reversed in February, as the rising iron ore price boosted the world's lowest-cost large-scale producer. Management was rewarded for its controversial policy of ramping up production to squeeze more expensive rivals.

Billiton blitz

BHP Billiton is a large-scale producer as well as a miner, and has been helped by the recent recovery in the oil price, in the wake of the OPEC and non-OPEC production cuts. It was also lifted by President-elect Trump's proposed infrastructure blitz, which should drive up demand for metals. Chinese GDP growth has stabilised at a respectable 6.7% this year, supplying another tailwind. These forces may wane next year.

BHP Billiton has been a great contrarian play for the brave in 2016 and there could be more to come. Pre-tax profits in the year to 30 June 2017 are forecast to hit £7.46bn, a smart reversal from last year's £7.26bn loss. Forecast earnings per share growth is an incredible 368%, which should help to trim today's sky-high valuation of 69.9 times earnings. The company is on the mend, just don't expect it to repeat this year's surge in 2017.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.