Is BHP Billiton plc heading to 1,500p after today's production update?

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BHP Billiton mine

Shares in mining giant BHP Billiton(LSE: BLT) are down slightly today after the company issued something of a lacklustre production update, although beyond the headlines, the update contained good news. 

The most notable change in the company's production report was a 6% decline in Q1 iron ore production. The decline is a result of a rail maintenance programme, lower volumes from its Yandi mine and no production contribution from the company's now infamous Samarco mine. Production came in at 57.6m tons for the three-month period down from 61.3m as reported in the year-ago quarter. 

BHP also stated that it's now reviewing its copper production forecast of around 200,000 metric tons after a two-week power outage in South Australia, which halted production at the Olympic Dam mine. 

Improving outlook

Production data aside, the most important statement within the press release issued by BHP today comes from chief executive Andrew Mackenzie. He writes that the company has seen "early signs of markets rebalancing," in the commodities sector. Also "fundamentals suggest both oil and gas markets will improve over the next 12 to 18 months, and iron ore and metallurgical coal prices have rallied this year."

Broadly speaking, this is good news for BHP, as Mackenzie points out: "Together, the combination of steadier markets, continued capital discipline, improved productivity and increased volumes in copper, iron ore and metallurgical coal should further support strong free cash flow generation this financial year."

So, after several years of turbulence, it now looks as if BHP is finally regaining its footing as commodity markets rebalance. And as this rebalancing plays out, it could drive shares in the company much higher. 

Room to move higher? 

City analysts are currently expecting BHP to report earnings per share of 52.9p for the year ending 30 June 2017. These forecasts are based on current commodity price estimates. But as any commodity investor will tell you, the markets can change very quickly, and as we're only one quarter into BHP's financial year, there's still plenty of time for earnings forecasts to be revised higher if commodity prices rally. 

There are already some signs that this could be the case. Thermal coal prices are up by more than 100% since June at $100 per tonne for the first time since 2012. Iron ore prices have gained nearly 50% since the January lows. And talk of an OPEC production cut during November has sent the price of oil back over $50 a barrel. All in all, the parts are moving in the right direction for BHP's earnings projections to be revised higher. 

It wouldn't take much for the shares to rally following earnings revisions. City projections are calling for earnings per share to rise 183% this year, a 30% improvement on the current estimate would give earnings of 68.8p per share. Assuming shares in BHP continue to trade at their current multiple of 22.2 times forward earnings this implies a price of 1,527p. 

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Unfortunately, the one area where BHP falls down is income. After last year's dividend cut, shares in the company now only yield 2%. 

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