BHP - BHP Group

[ducati916]

BSD

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

Absolute nonsense.
Where exactly do you think you will find the assets that are going to generate your cash-flow?

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).

If they forward hedge, being one of the larger players, they will cause prices to fall. As their margins currently heavily weight high prices over unit production, this will kill the golden goose of high[er] prices that are responsible for all that cash-flow.

With falling prices, watch out, here comes the speculative money chasing prices down further [in the same way they have chased them up]. With falling revenues impacting highly leveraged Net Profit, down goes the enterprise value [not that it matters, as it would now be private].

But, what they would note is the shrinkage in value of all these currently spot market valued assets in the ground. Thus the selling, would not be at premium prices, debt could not be reduced, cash-flows shrinking, interest payments high, an unholy mess. LBO's will not touch BHP.

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.

A good example of utter stupidity.
Ok, BHP could be a takeover target, there is obviously an absolute glut of cash in the system, but if the credit cycle turns, this one could be a bankruptcy, airlines hold the record I think for the most capital destroyed.

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)

Depreciated [depletion] in the case of RESOURCE businesses, far from being irrelevant is one of the most IMPORTANT metrics period. He who ignores depreciation is headed for serious trouble.

rederob

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.

Really.
How specifically would you accomplish this?

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.

So, BHP would be vulnerable to falling prices for commodities?
Strange, the impression given was that BHP was [is] bullet proof, a sure thing, no brainer etc. I'm shocked.

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.

So, if prices fall, [shock, horror] Net Profit & Cash-flow may fall?

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.

I notice the trip in Gold has also been extended, as $800 before Dec.31.06 looks like fantasy land at the moment.

BSD

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

Credit cycle.
I'll say it again........credit cycle
Demand is based on investment dollars looking for a return. When credit runs dry......adios commodity bull market. [Or any bull market for that matter]

LBO activity correlates with credit cycles, and bull market tops.
The current LBO cycle is smashing records all over the place.

jog on
d998

 

[rederob]

BSD

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

Absolute nonsense.
Where exactly do you think you will find the assets that are going to generate your cash-flow?

It's great fun reading stuff like this.
Apparently the stated "assets" also have a forward-valued future cash flow that we can rely on.
I will ring Chip and let him know it's "that easy".
He can then sack a few hundred employees in headquarters and just tell everyone to read the company's reports for everything they need to know about how much BHP is worth down the track.
I wonder if Chip will pay me a "spotters" fee for such incredible advice?

 

[ducati916]

It's great fun reading stuff like this.
Apparently the stated "assets" also have a forward-valued future cash flow that we can rely on.
I will ring Chip and let him know it's "that easy".
He can then sack a few hundred employees in headquarters and just tell everyone to read the company's reports for everything they need to know about how much BHP is worth down the track.
I wonder if Chip will pay me a "spotters" fee for such incredible advice?

Hey, I remember Chip from the Gold thread, he was the tea boy wasn't he. Do pass on my regards and best wishes for his promotion to dish-washer.

jog on
d998

 

[rederob]

Hey, I remember Chip from the Gold thread, he was the tea boy wasn't he. Do pass on my regards and best wishes for his promotion to dish-washer.

jog on
d998

Once a year you will have a Goodyear.
ducati, you will have to wait till 2007.
I guess there's a problem with the kiwi calendar....... something to do with counting sheep.

By the way, a kiwi told me why farmers prefer to tie rope to keep their trousers up. Apparently their belts had so many notches cut into them their pants kept falling down.
So now we know why sheep run scared!

 

[haemitite]

I wonder how long it will take before ducati and rederob realied that they have embarassed themselves.
I enjoy your posts BSD, a pity that they are wasted on some here.

 

[rederob]

haematite
I look forward to your forecast price of nickel in 2007.
I do recall you mentioning that you thought it would be lower in 2007 (a post in th Minara thread early September).

 

[BSD]

Thanks haemitite

After an excess of frustation on the commodities thread; I have given up responding to Ductati.

I still haven't worked out if he is serious or taking the mickey.

 

[ducati916]

I wonder how long it will take before ducati and rederob realied that they have embarassed themselves.
I enjoy your posts BSD, a pity that they are wasted on some here.

I was going to overlook your gaffes, as I thought, it was a gallant effort, but, oh well.

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)

Of the items that you have listed, they of course are not costs at all.
They are Capital Spending, or INVESTMENT which is something else entirely, as of course COSTS cannot be capitalized, COSTS cannot be depreciated and COSTS must be expensed. Therefore, the reference to investment, being classified as a cost would materially alter the Income Statement, Balance Sheet & Cash-flow Statement.

So, in summary, nonsense.

As regards BHP being a high margin business, well yes, and no.
You see the margins are highly leveraged, high prices in the spot market, and you have increasing margins, low prices in the spot market, and you have shrinking margins.

So incorrectomundo.

And the last in regards to LIFO & FIFO.
BHP is a FIFO producer, and FIFO overstates profits in time of rising prices. Currently we have [or have had] rising prices [commodity bull market from "99] and BHP has ridden the crest of that wave on massively leveraged Net Profit [hence the low P/E] due to HIGH EARNINGS not a low security price. Cash flow is strangely, directly correlated to cash-flow, and FIFO increases cash-flow when prices are rising, whereas, LIFO understates Net Profit & cash-flow in a rising price environment

Therefore, incorrect.
jog on
d998

 

[haemitite]

ducati,

This may surprise you - FIFO & LIFO are accounting treatments

So I'm very curious to understand how accounting treatment impacts either the amount or timing of cashflows.

As for all your cost and balance sheet mumbo jumbo, suggest you go back and read up on BSD. Its all about net present value of cash flow.

 

[ducati916]

ducati,

This may surprise you - FIFO & LIFO are accounting treatments

So I'm very curious to understand how accounting treatment impacts either the amount or timing of cashflows.

As for all your cost and balance sheet mumbo jumbo, suggest you go back and read up on BSD. Its all about net present value of cash flow.

BSD is as confused as you are, well, ok, not as confused as you.

Let's use the hypothetical pile of coal.
The first coal produced is at the bottom of the pile First In
The later produced coal is thrown on top, Last In

Now, prices [both prices of unit costs, and selling prices] are rising slowly and steadily, like our current commodity bull market thus;

If we take our Last In First Out as our accounting standard, this will most closely on an accrural basis represent replacement cost thus will understate Net Profits.

If we take our First In First Out as our accounting standard, we shall inflate our Net Profits [leverage them] as, we shall cost our inventory at the lower production cost, but sell the inventory at the high spot prices, thus providing on an accrural basis misleading [but not illegal] financial statements.

So, the NPV of the cash-flow is materially distorted, giving excessively high valuations, and thus drawing in the amateurs at, or fairly near the top of a bull market.

jog on
d998

 

[BSD]

Accounting profit is not the same as cashflow


Now repeat a thousand times

 

[haemitite]

And he was doing so well until the very last line.

PS - just how long do you think a standard coal stockpile takes to build & reclaim ducati?

 

[ducati916]

Accounting profit is not the same as cashflow


Now repeat a thousand times

Correct.

However, cash-flow is calculated from the cash-flow statement. The Cash-flow statement is built from the Income Statement & Balance Sheet.

Cash-flow is an analyst adjusted figure. It can be a very different figure depending on who you talk to.

Second, cash-flow, like Net Profits, is subject to distortion [leverage] in exactly the same way, therefore, cash-flow can also be overstated, and thus NPV calculations will overvalue the business.

jog on
d998

 

[MiningGuru]

Notice out that one of the Directors just bought 10,000 shares.

I remember to December last year when a number of Directors bought just prior to the December price surge.

Is it going to happen again this year?

 

[Ken]

Directors have money.

They have to put it somewhere.

BHP is a big blue chip stock. You would be pretty stiff if you invested in BHP for 10-15 years and didnt get any capital growth.

I see BHP undervalued still, but they have also copped some negative press.

If the so called mining boom is now then why arent BHP pushing new highs....

It should be shouldnt it...... Or are the big fish just making millions as it bounces between $25 and $27.


Either way if it hits $24.50 again i'll be getting 1000.

 

[Ken]

When it has another run again it will happen in a hurry.

All these tiny uranium companies booming at the moment.

I wouldnt have thought BHP would have left Uranium alone....

Few steady years though. All patience with them.

 

[scsl]

Directors have money.

They have to put it somewhere.

BHP is a big blue chip stock. You would be pretty stiff if you invested in BHP for 10-15 years and didnt get any capital growth.

I see BHP undervalued still, but they have also copped some negative press.

If the so called mining boom is now then why arent BHP pushing new highs....

It should be shouldnt it...... Or are the big fish just making millions as it bounces between $25 and $27.


Either way if it hits $24.50 again i'll be getting 1000.

Well if I were a BHP director, I'd be buying as much as I could! (-thinking long-term of course)
---
The negative press seems to be increasing by the day. MacBank has joined Merrill's downbeat view on the resources sector. Instead of the mega-miners, they're suggesting to be more selective i.e. stocks like Zinifex and Minara.

Would any short term traders, chartists like to give me a clue as to where BHP is likely to head in the next week? I understand that I've got to make up my own decision, but I'd appreciate your views. I'm long on UK and Australian BHP CFDs atm and am getting worried. My gut feel is that BHP (Aus) is headed towards between $24-25.

 

[ducati916]

Short term I'd say down.
But, at 50/50, my guess is just that, a guess.

Fundamentally, BHP is just plain overvalued.

jog on
d998

 

[wayneL]

A few of the metals miners are being sold off in the US. BHP:NYSE is back under $40 once again.

Though not the only sector experiencing whackage this evening.

 

[ducati916]

Looking at it a different way;

Over the last 10yrs;
Revenues = +12.5% compounded growth
Net Profits = +44.7% compounded growth
Share price = +18% componded growth [if you bought at the low, & sold at the high, you would have returned 425% on your capital]

Is it any wonder that it sports a *low* or reasonable P/E?
The Net profits leveraged by the commodity bull have distorted the valuation.
If you buy BHP at current prices, you are not buying BHP, you are really buying the anticipated continuation of a commodity bull market.

jog on
d998