Australian (ASX) Stock Market Forum

BHP - BHP Group

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kennas said:
Ducati, are all your assumptions on the value of BHP based on falling demand and falling prices in line with the cycle? And if so, what if you are wrong? What if demand continues to outweigh supply for some years to come? What if Chindia (and other growing nations - there's plenty out there) keep growing at 10% ish a year for another 10 years? Won't this very basic premise continue to support strong commodity prices into the future?

Also, not sure what your point is with the chart. Last few bars indicate higher low and higher high, so perhaps it's continuing the trend up. Perhaps you are just referring to the fact it's been going up for 4 years. Probably 10 more to go I reckon.
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No, not really. As far as commodity prices are concerned we have three possible scenario's;
*prices continue to rise
*prices stay more or less stable
*prices fall

Only in scenario #1 does BHP continue to record increasing revenues in excess of production gains [some 2.3% odd] and thus support the further growth theory and increases in shareprice.

If prices reflect scenario #2 and stay fairly stagnant, the slowing growth will quite possibly trigger momentum and growth based investors out, this can trigger general technical selling.

Obviously in scenario #3, falling prices signal earnings shrinkage, and that is never good for a premium valued shareprice.

No volume, no interest in 2003, commodity bull market was underway, but vastly under-appreciated by the average retail investor/trader.

Today, massively increased volume, share price pretty stagnant, lot's of hype and ramping by the brokerages, and the vast majority quote to me what their analyst has recommended, yada, yada.

I can find numerous examples of brokerage flops, and endless commentary by numerous posters as to the ineffectiveness of brokers/analysts generally.
As usual, the extreme bias of speculation blinds many to an unbiased and rational approach.

People love their charts, so, a chart.
It illustrates the loss of price momentum, the huge increase in volume, and suggests in technical analysis terms distribution.

Could I be wrong?
Absolutely, which is why the game is so fascinating.

jog on
d998
 
ducati916 said:
No, not really. As far as commodity prices are concerned we have three possible scenario's;
*prices continue to rise
*prices stay more or less stable
*prices fall

Only in scenario #1 does BHP continue to record increasing revenues in excess of production gains [some 2.3% odd] and thus support the further growth theory and increases in shareprice.

If prices reflect scenario #2 and stay fairly stagnant, the slowing growth will quite possibly trigger momentum and growth based investors out, this can trigger general technical selling.

Obviously in scenario #3, falling prices signal earnings shrinkage, and that is never good for a premium valued shareprice.

No volume, no interest in 2003, commodity bull market was underway, but vastly under-appreciated by the average retail investor/trader.

Today, massively increased volume, share price pretty stagnant, lot's of hype and ramping by the brokerages, and the vast majority quote to me what their analyst has recommended, yada, yada.

I can find numerous examples of brokerage flops, and endless commentary by numerous posters as to the ineffectiveness of brokers/analysts generally.
As usual, the extreme bias of speculation blinds many to an unbiased and rational approach.

People love their charts, so, a chart.
It illustrates the loss of price momentum, the huge increase in volume, and suggests in technical analysis terms distribution.

Could I be wrong?
Absolutely, which is why the game is so fascinating.

jog on
d998
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Thanks ducati. Yes, it is fascinating at the moment. And I just love how brokers can have such vastly differing opinions on stocks. Just how can company XZF be a sell to one and a strong buy to another? LOL. I suppose there lies the answer to how we all here might have different opinions. If they can't agree with their DBAs and living the market, how can we poor forum surfers agree?
 
But I am buying. I strongly believe the big end of the resource will play catch up game. and secondly, I strongly believe soon or later LBO will do something about BHP.
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LBO, very unlikely.
Why?

LBO's require the following;
*high free cash-flow
*low debt
*low required reinvestment rate
*reasonable growth rate
*moderate share price

The first two do qualify BHP. It has good cash-flow & low debt.
The reinvestment rate is 12%, far too high.
The growth rate is an adjusted 2.3%, too low.
Moderate share price, no, currently overvalued.

jog on
d998
 
ducati916 said:
LBO, very unlikely.
Why?

LBO's require the following;
*high free cash-flow
*low debt
*low required reinvestment rate
*reasonable growth rate
*moderate share price

The first two do qualify BHP. It has good cash-flow & low debt.
The reinvestment rate is 12%, far too high.
The growth rate is an adjusted 2.3%, too low.
Moderate share price, no, currently overvalued.

jog on
d998
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Actually I think an LBO won't be interested because cashflow and profit is too unpredictable on a commodity producer and therefore too risky for the gearing they undertake.

Disagree on valuation but been there, done that.
 
OK

FWIW, I like anagrams, but LBO is not computing.

WTF is an LBO FFS?

TIA
 
potato said:
thats a silly question Wayne, every1 knows LBO is a large brown octopus...
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Come on Potato, it's actually, Little Brown Octopus. Get it right. :)

But, on the serious side, this would be the ultimate private equity deal, when the planet (well NYC) is awash with cash. Don't be surprised if something like this happens in the top end of town. I agree that breaking this up via seperate IPOs might work. Why not? BHP is getting just too darn big. How can one man effectively control such a beast? Or, do I have no idea? Yep, you're right. :eek:
 
ducati916 said:
LBO, very unlikely.
Why?

LBO's require the following;
*high free cash-flow
*low debt
*low required reinvestment rate
*reasonable growth rate
*moderate share price

The first two do qualify BHP. It has good cash-flow & low debt.
The reinvestment rate is 12%, far too high.
The growth rate is an adjusted 2.3%, too low.
Moderate share price, no, currently overvalued.

jog on
d998
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Excellent, thank you for the analysis for both low P/E, and LBO possibility. I enjoy read them because of your good knowledge.

Somehow, when you think logically, the market has different ideas. It is part of the game.

LBO might be not possible maybe because of national interests. (unless pommy want it).

But my point is very simple, resource giant’s value sometimes cannot be fully recognized because of some long term, and idled assets.

For example, the uranium assets in BHP are earning pennies, but it worth a lot of money on resources basis.

Yeelirrie 52,500t U3O8 Worth $1.2b (use NEL valuation), cannot do anything, maybe forever.

Olympic Dam 1.76mt Worth $39b (use the same valuation, if not higher)

Sitting on over $40b asset, how much money it made last year with uranium asset?

BHP produce less than 4000t with long term contract. Luck if they can sale all of them for $100m. assume the cost is 0 as by product, the profit is $100m.

With $40b worth of asset to generate $100m profit, wonderful, right? Sell the asset, put the money in the bank will generate at least $2.4b interest!(with Etrade cash deposit rate at 6%)

How many other idle assets like this?

Of course, please excuse me for over-simplify the situation. I just try to make my point.
 
so your basically saying bhp

are going to

WIN THE GAME!!!!!


all ords are now 5400 when bhp starts kicking some goals again will there just be a swing in positions fund managers hold.... e.g sell off in the performers last 6 months.... or will the all ords go to 6000?

if BHP is $35 this time next year, would all ords be over 6000....?

i think BHP will put its kicking boots on but it is scary if the rest of the market comes along. could cause a burst at the top.
 
Ken said:
so your basically saying bhp

are going to

WIN THE GAME!!!!!


all ords are now 5400 when bhp starts kicking some goals again will there just be a swing in positions fund managers hold.... e.g sell off in the performers last 6 months.... or will the all ords go to 6000?

if BHP is $35 this time next year, would all ords be over 6000....?

i think BHP will put its kicking boots on but it is scary if the rest of the market comes along. could cause a burst at the top.
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Just sick and tired of small companies busy spinning off so-called uranium asset, and big companies siting on wonderful assets, can't or don't want to do anything about it;

And also those LBOs busy buying the retails, newspapers,painting companies, free-to-air televisions (cyclical, growth, or obsolete industry, it's your call) with crazy price. The management bought the Las Vegas local Station Casino for P/E like 40. The expect the Las Vegas will double the populations before they can sell to some other crazy people. Obviously they are betting on the party time on and on forever! What is wrong with resource companies with P/E in 10s and a lot of wonderful assets?
 
mmmmm

But my point is very simple, resource giant’s value sometimes cannot be fully recognized because of some long term, and idled assets.
For example, the uranium assets in BHP are earning pennies, but it worth a lot of money on resources basis.

Yeelirrie 52,500t U3O8 Worth $1.2b (use NEL valuation), cannot do anything, maybe forever.
Olympic Dam 1.76mt Worth $39b (use the same valuation, if not higher)

Sitting on over $40b asset, how much money it made last year with uranium asset?
Click to expand...

The LBO question has raised some interesting questions as to a value on BHP, as of course an LBO would purchase the entire business.

Using the latest Balance Sheet 06/30/06

Total Assets = $48.516B
Total Liabilities = $24.298B
Net Total Assets = $21.218B
Enterprise Value = $131.93B

Assuming your calculations are correct, based I assume on current spot prices for uranium, then we can add;

+$40.0B undervalued assets
Net Assets = $61.298B
Enterprise Value = $131.93B
+20% premium for purchase price = $26.386B
Net Enterprise Value = $157.93B
Less Net Assets $61.298B

Value created/destroyed = [-$96.63B]

Therefore, even using your figures, there will be no value in an LBO at anywhere near the current price of BHP. It just makes no sense. If BHP was valued at my "value" figure, then we would have a very different set of figures, and BHP in the current environment might indeed be a candidate.

The LBO candidates, in the main tend to be businesses that are currently unpopular, or have some insider catalyst for unlocking the value. For example the large medical provider HCA, bought out in conjunction with KKR, has a member of the Senate sitting within the LBO directorship, thus regulatory benefits can be monetised.

jog on
d998
 
ducati916 said:
mmmmm



The LBO question has raised some interesting questions as to a value on BHP, as of course an LBO would purchase the entire business.

Using the latest Balance Sheet 06/30/06

Total Assets = $48.516B
Total Liabilities = $24.298B
Net Total Assets = $21.218B
Enterprise Value = $131.93B

Assuming your calculations are correct, based I assume on current spot prices for uranium, then we can add;

+$40.0B undervalued assets
Net Assets = $61.298B
Enterprise Value = $131.93B
+20% premium for purchase price = $26.386B
Net Enterprise Value = $157.93B
Less Net Assets $61.298B

Value created/destroyed = [-$96.63B]

Therefore, even using your figures, there will be no value in an LBO at anywhere near the current price of BHP. It just makes no sense. If BHP was valued at my "value" figure, then we would have a very different set of figures, and BHP in the current environment might indeed be a candidate.

The LBO candidates, in the main tend to be businesses that are currently unpopular, or have some insider catalyst for unlocking the value. For example the large medical provider HCA, bought out in conjunction with KKR, has a member of the Senate sitting within the LBO directorship, thus regulatory benefits can be monetised.

jog on
d998
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Sorry, I cannot understand your calculation. What is wrong to unlock possible $40b value? How many other idle assets do they have? If you do through study, you might find over $100b idle assets. I don't know.

If you control BHP, sell a bunch of idle assets, use the money to buyback shares, retire the debt, BHP may be so pretty that make ZFX's PE ratio looks too high. Now you can sell it to RIO, RCVD, AAL..., or simple re-float it.
 
mmmmining said:
Sorry, I cannot understand your calculation. What is wrong to unlock possible $40b value? How many other idle assets do they have? If you do through study, you might find over $100b idle assets. I don't know.

If you control BHP, sell a bunch of idle assets, use the money to buyback shares, retire the debt, BHP may be so pretty that make ZFX's PE ratio looks too high. Now you can sell it to RIO, RCVD, AAL..., or simple re-float it.
Click to expand...

Best stay away from LBO's I guess.
jog on
d998
 
ML downgrades mega-miners, including BHP. The abstract is free the following link.

Interest points are:
1. BHP price is down about 20% from it is high in May, ML recommendation is buying from May to now; You would lose you money if you follow the recommendation (I admit too tough on the analyst)

2. The analysis say forecast 30% down in base metals in 2007. The only metal is down is copper. The aluminum is mentioned as substitute of copper, assume it is going higher, and the research is bullish on nickel, and zinc, and uranium (uranium a base metal?) How could they concluded that the whole base metal is going to down 30%?

I cannot figure it out. Help please. Thank you.

http://www.mineweb.net/mining_finance/517020.htm
 
mmmmining said:
Sorry, I cannot understand your calculation.
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There is nothing to understand - because it doesnt mean anything and has no relevance.

An LBO (or any purchase of a business) does not need to be made at a price below the net asset value to be accretive. Net asset value (typically based on depreciated histroric costs) has little relevance to the actual value of the business (based on discounted future cash flows)

To ascertain the value of the business the future cash flows need to be forecast - something a balance sheet does not do.


Private equity will eventually move into the commodities sector. Being focussed on cashflow generation (and not accounting profit) they would structure the businesses differently.

They could buy BHP, hedge the forward production to lock in the cash flows, sell some businesses attracting forward multiples well in advance of the current 10 times and gear the whole thing up (extracting billions).

Qantas is a prime example of a presumingly risky business being taken over by private equity. The new owners will hedge costs forward and use the added security of cashflow to carry a lot more leverage.
 
BSD
I agree with your logic.
But the new breed of private equity firms are run by numbers that allow accountants to take over.
I could go into Qantas and make a bucket load of money by breaking everything down, selling off non-core operations and bolstering sectors that generate $$$s.
Mining operations need the nouse of industry specialists that have the ability to plan well ahead. Any wrong decision can cost billions in no time at all. even right decisions, like BHP's Ravensthorpe project, can get caught out by bad timing, or bad prices, or high costs, that are nearly impossible to factor in too far in advance.
Any new operators "moving in" on a large diversified miner will need to immediately show they have the capacity to "manage" the business. And if they can't, their money will go quicker down the drain than light into a black hole.
In relation to an earlier comment about copper prices being now lower, take care to understand that year on year comparisons still have this metal at a higher average price. In the case of valuing BHP it is vital to note that the majority of its output continues to be sold well above last year's average prices. In the case of BHP's uranium, it is hard for lay folk to "value' its contribution as BHP is not generous with its numbers/contract values/hedges.
However, if it is the case that most of its term contracts are coming in for renewal in the period to 2008, then one can bet the new contract values will take account of uranium's new price paradigm. add that point to its intention to markedly ramp up uranium output and the long term picture is rosy.
In the intermediate period I have no real view on where BHP is headed: I rejoined it the other week for another very long ride.
 
BSD said:
There is nothing to understand - because it doesnt mean anything and has no relevance.

An LBO (or any purchase of a business) does not need to be made at a price below the net asset value to be accretive. Net asset value (typically based on depreciated histroric costs) has little relevance to the actual value of the business (based on discounted future cash flows)

To ascertain the value of the business the future cash flows need to be forecast - something a balance sheet does not do.


Private equity will eventually move into the commodities sector. Being focussed on cashflow generation (and not accounting profit) they would structure the businesses differently.

They could buy BHP, hedge the forward production to lock in the cash flows, sell some businesses attracting forward multiples well in advance of the current 10 times and gear the whole thing up (extracting billions).

Qantas is a prime example of a presumingly risky business being taken over by private equity. The new owners will hedge costs forward and use the added security of cashflow to carry a lot more leverage.
Click to expand...
You can only hedge forward for so long

Plus commodity companies are different from the normal private equity targets, they have massive upside optionality - imagine the BHP share price if copper and oil had been capped.

Private equity works beacuse they bring in experiencef management teams to cut costs and they can work out of sight of the public. Its not about the debt funding, debt/equity structuring doesn't change a dud underlying business into a good one

How would private equity add value to a Rio or BHP?

Give away price upside?
Cut exploration?
Reduce growth projects?

Cutting the cost base would destroy the revenue base, not a geat outcome in a high margin business

Both companies already do manage for cashflow, both state that they make decisions on NPV (note Ducati, LIFO or FIFO policy doesn't seem to rate highly as a cashflow driver)
 
Rederob and haemitite - I dont disagree with anything you are saying.

I dont think the LBO guys have the balls or the knowledge/skll set to take out Hills or Rio. Exxon or another big oiler on the other hand...

I do believe RIO and Hills are under geared though and I would prefer them to become-one with Hills as the aggressor, or at least get acquisitive while some mid caps with high quality projects are trading at big discounts (OXR,EQN etc)

The LBO players are not focussed on creating good long term businesses, they are interesting in stripping cash and tarting up businesses for sale on a five year turnaround.

Look at Repco, ex Private Equity deal, made the punters and bankers a heap and is now a complete piece of rubbish unable to keep the bankers at bay without another new owner taking control.


The longevity and scope of the current cycle has been and will be contined to be extended due to the discipline of the management teams of the majors restricting the quantum of the supply side response

Much of the current management practice is excessively risk adverse.

Very limited new exploration spend
Buybacks and more buybacks favoured over expansion spending
Low divs

Some would/do call it a lack of entrepreneurial skill or risk taking that comes from MBAs running mining businesses - it is probably somewhere in between.
 
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