BHP - BHP Group

[ducati916]

BSD

A very bullish analysis.
Nothing particularly wrong with looking at the bullish picture, except that it only presents one side of the story.

As always, there is an alternative narrative that should be examined, this is called risk management, or due diligence, common sense, etc.

If after looking at both sides, you are still super bullish, then that stock can be purchased.

Of course, the negative viewpoint, invariably makes the provider of the bad news intensely unpopular.....shoot the messenger psychology.

jog on
d998

 

[rederob]

rederob
*At low "Prices" value received is higher than at high "Prices"

*Not really interested in "TRADERS" more investors. You advocated that BHP @ circa $30+ was an investment. I disagree. It will definitely be a trade, any price has a "trade" potential. It does not possess investment merit at current prices $20+

*Peak oil. If my assertion is correct and peak production worldwide has happened, or imminent, then in the short term price could potentially rise and rise strongly. This will drive innovation and technology to surplant oil in one or more of it's current uses.

One of the largest consumers of oil, the automobile, already has a viable alternative...the electric car [there is a documentary film] This could be produced very quickly [12mths] and totally make oil [for automobiles] redundant.

This would have a significant effect on the demand curve for oil, thus driving prices lower.

Thus short-term, oil, is a good play. Longer term, oil will be potentially not so good.

*Again, 5% is the current figure, the technology is relatively new. This will improve, thus far greater % will be recycled [if required]

*Last comment....??
Relevance to BHP?

Now you see, I have indulged you and answered all of your questions.
You on the other hand answered my question not at all, just a flurry of diversionary questions.

So, I repeat;
What qualifications do you possess that would provide the ability to correct my asserted, errors, omissions, etc?

jog on
d998

PS. Should anyone be interested, the analysis of BHP's current financial results are on my blog. I shall post them here later today or tomorrow.

ducati
Your stated answers are typically obscure and poorly thought.
Let's just take your points about oil, and the "car" as an example.
You see a "short term" opportunity for oil due to rising prices emanating from peak oil. The bell curve on peak oil gives us many years leeway before severe impacts arise, so you may need to define what you mean by short term.
Your comment on the electric car is valid to the extent that it is possible to replace the present ICA (internal combustion automobile) with EV s(electric vehicles).
So let's do some quick sums, using only the USA as a basis. Present new car sales over 7 million units pa. EV uses at least twice average amount of copper wire as conventional ICA which averages 25 kilos per unit - therefore EV would average at least 50 kilos per unit. So if all new vehicles sold in USA were replaced by EVs an additional (mimimum) 175 million tonnes of copper would be needed.
However, that equation relates only to new sales, which would mean that all the other ICAs would need to be quickly replaced by EVs. Given there are over 200 million cars in the USA an extra 5 billion tonnes of coppper will be needed (over and above present needs) to ensure the Americans can drive around as they presently do.
Simply put, just to convert the US to electric vehicles would wipe out present copper inventories in no time at all. Then, of course, we need to offer EVs to the rest of the world!
The above example has only focussed on the EV affecting copper. I could have mentioned that lithion ion or nickel metal hydride battery manufacture would be problematic.
Given what BHP mines and sells, I have a suspicion that replacing the fleet of global cars with new electric vehicles would benefit BHP significantly in years ahead if your peak oil scenario played out. It's certainly plausible.

If you wish to ask about what skills are involved in "analysis", rather than qualifications per se, the above provides a crude but useful example. Investing effectively requires one to examine many variables and be astutely forward looking. If we can "read" the probability of major future events and themes, and map these back into equities that are most likely to prosper, we too are likely to prosper.
Have a look at DYE and see what I mean.

 

[rederob]

Apologies: My above post has confused "tonnes" with "pounds", however my point about copper inventories being incapable of meeting demand for an EV scenario is equally valid.
LME copper inventories peaked in 2002 at around 1 billion pounds (one million tonnes).
LME, Shanghai and Comex warehouses presently hold less than 250 million pounds of copper. A twenty-fold increase would be needed to convert the US car fleet to EVs, and that's just not possible!
Put another way, if every pound of copper consumed by the US was diverted to the production of EVs, it would take 2 years to convert the fleet. That of course would be a very big problem for the other industry sectors that are responsible for about 90% of annual copper use (I'm not sure stopping home costruction for 2 years in the US would go down too well - an average US home consumes 4 times more copper than a car).


Quickly back to one of my questions to ducati:
"Which particular aspect of your analysis is in keeping with the price trend of BHP?"
ducati's reply:

rederob
*At low "Prices" value received is higher than at high "Prices"

I admit to being very confused by this reply.
If I sell BHP at a low price, the value received is higher than if I sell BHP at a high price?
"Value received" implies a consideration, that is, "money received".
I anticipate another reply from ducati with mumbo jumbo and word gymnastics, and distortions, that will completely debunk what I said.
So that there can be no confusion about the intent of my original question, I was seeking an explanation of how ducati's analysis which implied BHP was overvalued was in keeping with the market trend of BHP reaching higher highs.

 

[ducati916]

rederob

At a purchase price....value received is higher at a low price than at a high price.

Thus, you want to BUY low SELL high.

Currently you are buying high.
You MAY be able to sell higher, in which case, not a problem. However that involves some speculation due to the speculative component contained within the price currently [by my analysis]

But I'm sure you could have figured that out all by yourself.

As regards your analysis of copper. Apart from the typing error [forgivable] over tonnes/pounds [mixture of metric/imperial?] your copper analysis was very impressive.

Shame it's irrelevant.

GM signs for electric-car battery
Automaker hopes to beat Toyota to first plug-in
By TOM KRISHER
THE ASSOCIATED PRESS

TRAVERSE CITY, Mich. -- General Motors Corp. has signed an agreement with a battery maker that could propel it ahead of Toyota Motor Corp. in the race to bring plug-in hybrid and electric cars to market, a top company official said Thursday.

A123 Systems Inc., based in Watertown, Mass., already produces millions of nanophosphate lithium-ion batteries for use in cordless power tools, and it plans to apply the technology to automobiles.

GM Vice Chairman Bob Lutz said the deal, coupled with a published report that Toyota Motor Corp. would delay launches of lithium-ion battery-powered hybrids for up to two years, could give GM the lead in bringing the new clean technology to market.

"I think that our No. 1 competitor has some problems with their technology, and I do think that it very definitely opens a window of opportunity for us to be first to market with a genuine plug-in hybrid," Lutz said at an automotive industry conference in Traverse City where the battery deal was announced.

The Wall Street Journal, citing people familiar with Toyota strategy that it didn't name, reported Thursday that problems with lithium-ion technology forced Toyota to back away from plans to roll out the vehicles between 2008 and 2010.

Toyota spokesman John McCandless said the company does not comment on its product plans, but he disputed that the developments give GM an edge.

"No one can leap ahead of anybody until the products get to market," McCandless said.

Lutz said the lithium-ion battery being discussed by GM is safer and manages heat better than the technology Toyota was using.

He also hopes to be first to market with a pure electric vehicle that has a piston engine as an emergency backup, similar to the Chevrolet Volt prototype that the company unveiled at the North American International Auto Show in Detroit in January.

A123 expects to have the batteries ready for GM to test in vehicles by October. GM still hopes to have electrically powered vehicles on the market by the end of 2010.

David Vieau, A123's president and chief executive, said the technology can be moved from power tools to plug-in hybrid and electric vehicles.

"What you have to do now is put it in a vehicle" to test its thermal properties and see how it stands up to shock and vibration in a car, Vieau said.

Current hybrids, such as the hot-selling Toyota Prius, use nickel-metal-hydride batteries, which are larger than lithium-ion systems. The smaller lithium-ion systems let automakers pack more electric power into a smaller space.

GM and Toyota are well under way [again] to making electric cars commercially.

Peak Oil is not some fantasy, and it is much closer than most appreciate. Current reserves which is a highly speculative undertaking, takes Saudi estimates at being able to produce up to 10M/barrels/day IF required.

Saudi productive capabilities are seriously challenged on this basis.

jog on
d998

 

[ducati916]

Here is the analysis that was posted on my blog;

BHP released their financials early last week. Having now had a chance to read through them in-between Jury service, there are some interesting things going on.

BHP have two separate share repurchase programs that have currently been announced. The August program, a $3.0B program, is more or less complete now.

142Million common shares were repurchased at a cost of $2.957B or circa $20.82/share. Does this represent management’s assessment of value?
Ignoring whether this was good value or not, the allocation of cash-flow went;
$286M………………………….Share Capital
$2.559B……………………….Retained Earnings

So, we can count these earnings twice?
The first time, the earnings are earned via Revenue, flow through the Income Statement, ending up on the bottom line as Net Profit.

That Net Profit if not paid out in dividends, would then rightly be recorded as Retained Earnings.

However, that is not what happened.

Assuming cash was paid for the share repurchase program, out of Net Profit, the shares were repurchased, placed in the Treasury, awaiting cancellation. [Previous Treasury shares have been retired]

Meanwhile, the cash used for the purchase has been recorded as….Retained Earnings. At this point we have the same cash showing up in three different places;
*Net Profit [Retained Earnings]
*Treasury shares [Share repurchase]
*Retained Earnings [Share Repurchase via Treasury shares]

Now, if the shares are not retired [cancelled] and are stored in the Treasury, they should not be recorded under Retained Earnings, they however remain an asset that can be resold. Should this happen, then the proceeds will be recorded under Financing Cashflows, and the proceeds placed in Current Assets as cash.

If the shares are retired, then, the asset is destroyed, in effect, a Return of Capital.
The advantages of this strategy is that future earnings are divided over a smaller share base, thus earnings per share will rise.

In either case, these are not retained earnings.
Currently BHP are counting their earnings three times…a little optimistic.

Earnings were also reported without including “Exceptional Items”.
Exceptional Items totaled……………………………………. $259M
Not an insignificant sum. The general rule is, are the items normal business?
In the case of BHP I would say that they are, thus they should be included.
They were;
*Impairment of South African Coal operations
*Newcastle steelworks rehabilitation [maintenance]

Capitalised Interest……………………………………………$353M
This one is a disgrace. Capitalising interest boosts net earnings. With a company claiming such a successful earnings period, capitalising interest is particularly egregious.

Taxes.
BHP have been utilising Tax Loss carryforwards to reduce Taxable income [no figure supplied]
This company has lost money?

Deferred Taxes……………………….+53.6%
BHP has accelerated depletion for tax purposes. In a resource business this is important. If you purchase on the basis of shareholder figures, you are guaranteed to overpay by the Deferred Tax figure. Again, simply a ploy to boost per share earnings by subterfuge.

Revenues/Inventories/Receivables.
So if we take Revenues of $47.47 and subtract the contribution made by higher prices we come to $40.37 Billion which is a 3.2% increase in Revenues. Now Inventories and Receivables rose by 20.6% and 22.4% respectively.

If you accept that Revenues rose due to advantageous pricing as opposed to increased sales of production [which is the case] then this figure is confirmed by the increase within the Inventory. It is also interesting to note that if Revenues hide the sold production, Receivables suggest that BHP is financing their customers purchases. In this “high demand” era, why is that?

BHP is a highly cyclical company. BHP is a “Pricetaker” not a “Pricemaker” thus, in weak commodity price cycles, BHP can indeed lose money.

Therefore BHP has certainly boosted Net Income by;
Tax + Exceptional + CapInt………………………………………$612M + ?
Retained Earnings………………………………………………….$2.957B
Total………………………………………………………………..$3.569B+

Liquidity [Working Capital]
Total Current Assets……..$8776………………$11087
Total Current Liabilities…..$8661………………$10249
Net Current Assets……….$115.0……………..$838.0
Current Ratio……………….1.01………………..1.08

For a “Blue Chip” Investment, BHP does not come close to passing the working capital liquidity test [minimum = 2.0] It is almost 100% below the cut-off point minimum.

This, especially in a contractionary credit cycle is vital. We have seen $10B Hedge Funds go bankrupt in the space of 5 days. I’m not suggesting BHP is a Hedge Fund, just that liquidity is vitally important and if you don’t have it when you need it, bad things happen.

BHP does have a newly negotiated $3.0B credit revolver…but were you expecting your rock solid investment ever requiring emergency bank lending?

In addition BHP debt is increasing in the time of plenty;

BHP have issued new debt, and placed a Shelf Registration for future debt.
This of course underlines the fact that the ashflow from Net Earnings, ahem, has been spent.
Future Working Capital requirements exceeding cash on hand etc, will be financed via this new issued debt and the debt registered, and already sold.

$788M Floating rate due 2008
$788M 4.375% due 2014
$875M Floating rate due 2009
$625M 5.125% due 2012
$750M 5.4% due 2017

Those “Floating” rates, could seriously impact future earnings…..if of course they are not capitalised or re-financed.

So what were the real, or adjusted earnings?
Adjusted figures………………………………$1.894B

Not quite the headline grabbing BHP version.


jog on
d998

 

[stoxclimber]

For a “Blue Chip” Investment, BHP does not come close to passing the working capital liquidity test [minimum = 2.0] It is almost 100% below the cut-off point minimum.

I'm not getting involved in the BHP debate.
I don't even own BHP shares.
In fact, I think they are slightly overvalued.

However, I must stress strongly that saying a share is a risky investment if its current ratio is less than TWO is really silly. In fact, I'd have problems with management having current ratios OVER two. WORKING CAPITAL DESTROYS VALUE.

Best of luck sirs.

 

[ducati916]

I'm not getting involved in the BHP debate.
I don't even own BHP shares.
In fact, I think they are slightly overvalued.

However, I must stress strongly that saying a share is a risky investment if its current ratio is less than TWO is really silly. In fact, I'd have problems with management having current ratios OVER two. WORKING CAPITAL DESTROYS VALUE.

Best of luck sirs.

Really [in reference to Working Capital]
How so?

jog on
d998

 

[rederob]

ducati
Electric cars have electric motors.
Batteries power their electric motors.
When cars run on batteries alone (without motors) then my point about copper will be irrelevant.

On peak oil we are in agreement.
We are not in agreement about the time fame of the relative impacts it will have on equities that are exposed. In this regard you have again failed to indicate what you regard as "short term".

As for other analysis on BHP, BSD has raised many of the company’s growing revenue streams, yet you choose to ignore these as indicative of a bullish view. The more likely downside to BHP’s massive profits will come from an appreciating Australian dollar over coming years.

 

[ducati916]

ducati
Electric cars have electric motors.
Batteries power their electric motors.
When cars run on batteries alone (without motors) then my point about copper will be irrelevant.

On peak oil we are in agreement.
We are not in agreement about the time fame of the relative impacts it will have on equities that are exposed. In this regard you have again failed to indicate what you regard as "short term".

As for other analysis on BHP, BSD has raised many of the company’s growing revenue streams, yet you choose to ignore these as indicative of a bullish view. The more likely downside to BHP’s massive profits will come from an appreciating Australian dollar over coming years.

They already can [run without a combustion engine]
Whether they have an electric + combustion or electric only; copper is irrelevant.....the engine transfers power to a crankshaft, which drive the wheels.

In regards to "Peak Oil" I gave a timeframe.....it's already happened.
As evidence, the major fields that have categorically gone into decline.

Speculative, that the Saudi Arabian oil production has also hit peak production.

Therefore "short term" = 5yrs

As to BSD's analysis, it simply states BHP managements projections.

jog on
d998

 

[rederob]

They already can [run without a combustion engine]
Whether they have an electric + combustion or electric only; copper is irrelevant.....the engine transfers power to a crankshaft, which drive the wheels.

In regards to "Peak Oil" I gave a timeframe.....it's already happened.
As evidence, the major fields that have categorically gone into decline.

Speculative, that the Saudi Arabian oil production has also hit peak production.

Therefore "short term" = 5yrs

As to BSD's analysis, it simply states BHP managements projections.

jog on
d998

ducati
Let me put the case for copper in cars more clearly for you as you are having some problems with the concept.
ICE vehicles do not have electric motors to deliver power to a car's wheels.
EVs and hybrids do have electric motors specifically for that purpose. (If you go to the "hybrid synergy drive" link at this site there is a very good schematic of the hybrid variants: http://prius.toyota.com.au/toyota/vehicle/Content/0,4664,2393_842,00.html)
Therefore, EVs and hybrids consume significantly more copper than a conventional car because additional electric motors are essential to their operation.

Thank you for clarifying "short term" as 5 years: You may be unique with that view in trading/investing circles.

 

[ducati916]

ducati
Let me put the case for copper in cars more clearly for you as you are having some problems with the concept.
ICE vehicles do not have electric motors to deliver power to a car's wheels.
EVs and hybrids do have electric motors specifically for that purpose. (If you go to the "hybrid synergy drive" link at this site there is a very good schematic of the hybrid variants: http://prius.toyota.com.au/toyota/vehicle/Content/0,4664,2393_842,00.html)
Therefore, EVs and hybrids consume significantly more copper than a conventional car because additional electric motors are essential to their operation.

Thank you for clarifying "short term" as 5 years: You may be unique with that view in trading/investing circles.

No, not really.
EV's have already produced the 100% electric motor that drives the wheels, thus this extra "copper" is not necessary.

Thus your copper calculation, while interesting, irrelevant.

Unique.
That sounds like me.

jog on
d998

 

[ducati916]

I'm not getting involved in the BHP debate.
I don't even own BHP shares.
In fact, I think they are slightly overvalued.

However, I must stress strongly that saying a share is a risky investment if its current ratio is less than TWO is really silly. In fact, I'd have problems with management having current ratios OVER two. WORKING CAPITAL DESTROYS VALUE.

Best of luck sirs.

I note there has been no evidence provided to support this opinion.
How odd, the opinion seemed so entrenched.

jog on
d998

 

[ducati916]

And here we have Israel looking to break the addiction to ME Oil [Arab]
Technology will jump forward as increasing numbers of people start to examine the alternatives, especially as "peak oil" has quite possibly already occurred [just very quietly, you didn't expect trumpets?]

JERUSALEM: Holding company Israel Corp said on Sunday its board had agreed to invest $100 million in an electric car venture.

Israel Corp would own 33 per cent of the rights in the venture, which includes several investors and is being led by entrepreneur Shai Agassi, the company said in a statement.

The total investment in the initial phase of the car venture will be $200 million, inlcuding Israel Corp's $100 million investment, the company said.

Israel Corp said its participation in the venture is subject to due diligence as well as other conditions. Agassi in March resigned as head of software products at German software maker SAP to pursue interests in environmental policy and alternative energy resources.

Israel Corp owns stakes in chemicals, energy, shipping and semiconductor firms. Its shares were up 2 percent in afternoon trade, in line with gains in the broader bourse.

jog on
d998

 

[Freeballinginawetsuit]

Exactly what is the point of all this 'tit for tat' , chill out and simply accept you have different views on current/future fair value for BHP.

The current SP of BHP is what it is! and in the case of some they called it horribly wrong from a forward perspective some months back!.

 

[moses]

No, not really.
EV's have already produced the 100% electric motor that drives the wheels, thus this extra "copper" is not necessary.

Thus your copper calculation, while interesting, irrelevant.

On the contrary, Rederob's point about copper is perfectly relevant.

If an EV requires, say, twice the copper of a PV (because an electric motor is essentially made of copper), then car manufacturer's will need to buy twice as much copper as they do today.

My understanding of Rederob's argument is that this extra demand on copper will create shortages and force price rises, which will be to BHP's benefit.

You may disagree (and I haven't done the calculation), but you certainly haven't given a valid reason to dispute his argument. All you've done in the statement above is dismiss Rederob with some specious waffle that indicates you've both missed his point and don't have a clue what you are talking about.

 

[ducati916]

On the contrary, Rederob's point about copper is perfectly relevant.

If an EV requires, say, twice the copper of a PV (because an electric motor is essentially made of copper), then car manufacturer's will need to buy twice as much copper as they do today.

My understanding of Rederob's argument is that this extra demand on copper will create shortages and force price rises, which will be to BHP's benefit.

You may disagree (and I haven't done the calculation), but you certainly haven't given a valid reason to dispute his argument. All you've done in the statement above is dismiss Rederob with some specious waffle that indicates you've both missed his point and don't have a clue what you are talking about.

moses

So without doing the calculation, you are willing to accept anothers work?
This demonstrates your laziness.

Electric DC motors manufacture materials;

Major types of DC motors are:

Brushless DC Motors: These motors are used to drive CD-ROM spindles, fans, office products like Xerox machines, lasers and also in expensive aircraft models. They have a permanent external rotor magnet; three phase driving coils and Hall Effect devices that sense rotor position. They are more efficient than AC motors, do not produce excessive heat and last longer since there is no commutator.

Limited-Angle Torque Motors: These are special type of brushless DC motors and the torque is produced within 180 degrees of rotation. They are used in: direct laser mirrors, servo valves, open shutters used in heat-seeking sensors, position missile guidance radar antennas and power systems where the degree of rotation is small. The rotor carries field magnets and the stator carries the armature winding.

PM DC Motors: These are small motors that produce about 50% greater torque than other comparably sized motors. Magnets are made of Samarium-cobalt and the torque ripple is greatly reduced.

Coreless DC Motors: In these motors, there is no iron core, thus giving a low mass and higher acceleration and deceleration. The stator is made of a cylindrical permanent magnet that is placed in a housing made of mild steel. Rotors are wound in a honeycombed pattern to increase the torque. The commutator is made of gold, platinum and other precious metals. They are used to drive Capstan in magnetic tape drives and in high-performance servo-controlled systems.

Linear DC Motors: These are used in Maglev super fast trains and produce a linear force and no a torque. It has a stator and a slider. The stator has a laminated steel frame with conductors wound in transverse slots. The slider has sets of magnets, commutators, a bearing surface and it makes a path of magnetic flux between the magnets.

Let's have a look at "homemade" electric motors and a basic "how they work diagram;

jog on
d998

 

[ducati916]

moses

While I accept that there potentially will be copper utilised in an electric motor, currently, there is no evidence to support the huge increase in copper utilisation as advocated by rederob

Technology is also advancing.
For the major car manufacturers, commercial viability requires attractive profit margins. Thus, if oil and the cost/availability mandates a paradigm shift, they will allocate sufficient reserach money to create the highest profit margin that they can.

jog on
d998

 

[resourcesman]

Really [in reference to Working Capital]
How so?

jog on
d998

i didnt read much of this thread so I am gonna take a shot at what he meant.

Excessive capital, if its sitting in the bank doing nothing but earning low returns would have been better off being returned to shareholders (special dividends etc) so that they could make better use of it. To the extent that the capital is sitting within the company earning less than they could have elsewhere, value is being destroyed.

For example, if you were provided with one of two investments:

1. $100k sitting in an account that will earn 5% pa but cannot be withdrawn or sold until in 20 years time; or,

2. $100k that you can take now and do anything you wish with it

which option would you pay more to purchase?

 

[ducati916]

i didnt read much of this thread so I am gonna take a shot at what he meant.

Excessive capital, if its sitting in the bank doing nothing but earning low returns would have been better off being returned to shareholders (special dividends etc) so that they could make better use of it. To the extent that the capital is sitting within the company earning less than they could have elsewhere, value is being destroyed.

For example, if you were provided with one of two investments:

1. $100k sitting in an account that will earn 5% pa but cannot be withdrawn or sold until in 20 years time; or,

2. $100k that you can take now and do anything you wish with it

which option would you pay more to purchase?

As it was not your assertion [originally] I have no problem with your logic.

However, Working Capital, almost by definition, is not excess cash
Quite the reverse, Working Capital is the prudent level of liquidity required to ensure that bankruptcy does not ensue due to an inability to fund current liabilities.

Working Capital consists of;
*Cash & liquid instruments [bills]
*Receivables
*Inventory [all 3 components]
*Prepaid expenses
*Other

The financial ratio of a minimum of 2.0 has been accepted as the standard for some 100yrs+
Note that 50+ mortgage lenders, 10+ Hedge Funds have all gone bankrupt in the last 6 weeks due to a lack of liquidity [working capital]

So, what reasons are you advancing [original poster] to the revision of this standard?

Or was the comment simply "off-the-top of your head, and simply opinion?

jog on
d998

 

[rederob]

moses

While I accept that there potentially will be copper utilised in an electric motor, currently, there is no evidence to support the huge increase in copper utilisation as advocated by rederob

Technology is also advancing.
For the major car manufacturers, commercial viability requires attractive profit margins. Thus, if oil and the cost/availability mandates a paradigm shift, they will allocate sufficient reserach money to create the highest profit margin that they can.

jog on
d998

ducati
I'm not going to do more homework for you on the maths about copper utilisation in electric cars as the point I was making was conceptual.
However, I can see that your inability to grasp some simple concepts is going to be a continuing problem here.

moses
You hit the nail on the head.
Moreover, the point I have raised is not new, and is quite well understood by both motor vehicle manufacturers and base metal miners.