BHP - BHP Group

[MiningGuru]

Interesting Report in Eureka

BHP Billiton, the cash machine

My view remains that the market’s obsession about whether commodity prices are sustainable is taking the focus off the "company-changing" cash flows the resource sector is spitting out.

I believe these "super cash flows" are reducing the overall risk of the sector because management is showing discipline and using those "super cash flows" to either buy back large chunks of scrip, pay special dividends, or both. These super cash flows are being returned to shareholders, and I believe that will continue.

You don't even have to believe in a "super bull" commodity scenario to see BHP Billiton generate $US30 billion of free cash flow over the next three years ”” yes, that's free cash flow after capital expenditure of $US30 billion.

My research colleague David Radclyffe ran some scenario analysis today, at commodity price forecasts that are far from "outrageous", and the results are that BHP Billiton could have up to $US30 billion of free cash flow over the next three financial years, which equates to $A7 a share (25% of the current market price).

Using an average oil price of $US60 a barrel, an average copper price of $US2 a pound, an average nickel price of $US8 a pound, iron ore up 10% and then staying flat, and flat coal prices for both thermal and coking, the calculation comes to $US30 billion of cumulative free cash flow over the next three years. Then you need to then consider what BHP will do with its huge free cashflow.

The Freeport McMoran quarterly highlights the return to shareholders when cash flows overwhelm allocated capital expenditure commitments. Freeport earned $US1.74 a share in the second quarter and paid a total dividend, including a special, of $US1.06. In the six months to June 30, the company earned net income of $US739 million and returned 61%, or $US452 million, in dividends and share buybacks. The Freeport result is an indication of the potential for BHP and Rio Tinto shareholders as capital expenditure starts to slow. As a reminder, last year BHP paid dividends of US42 ¢, or a yield of 1.4%.

As BHP turns down the capex/expansion/investment tap in 2007-08 and 2008-09, the free cash generation becomes enormous. This strong cash flow generation is expected to yield increased returns to shareholders through increased dividends and further buybacks (each $US2 billion equates to a return of about 1.6%).

So the "upside case" really isn't that optimistic, with many of our assumptions significantly below spot prices, but in line with futures curves. Let’s just say that if we used spot commodity prices and averaged them for the next three years, the free cash flow BHP spits out is obscene.

What will they do with all the money? Free cash flow of $US30 billion or potentially more is a very high-quality problem for a board to have. What a great strategic problem to have ”” what to do with $US30 billion?

I've speculated aloud about BHP taking out Shell and bidding for Woodside Petroleum, but I suspect the more likely use of the free cash flow is a combination of huge buybacks and special dividends.


Bring it home, boys

If I sat on the BHP board I would be strongly considering how to unwind the dual-listing structure. My view remains that the dual-listing is actually playing a role in contributing to BHP's low P/E rating. The ever-widening discount the (UK-based) PLC shares command reinforces just how out-of-date the structure now is and why it needs unwinding.

I think the excess free cash flow should be used to buy back the entire PLC listing. Yes, buy back the entire thing over a three-year period. Buy out the hedge fund dominated register, and return BHP to its rightful spot as a purely Australian listed company.

The beauty of this idea is that you cancel 35% of the entire BHP Billiton register through time, and have an associated earnings per share uplift due to the number of shares on issue being lower. However, the good news is that the lower number of shares on issue in no way effects BHP ASX 200 index weighting of 10% as the UK shares are not included in the ASX calculations anyway.

If you offer the Poms a cash or scrip alternative at parity, and some choose scrip, the ASX 200 weighting will actually rise due more Australian dollar-denominated shares being on issue.

If I don't say so myself, the idea is a no-brainer. I can't see how this isn't in the long-term interests of the company and its long-term shareholders. The influential funds will continue to buy the buyback-generated earnings-per-share upgrades, while 10% of every Australian compulsory superannuation dollar that finds its way into Australian equities will find its way into BHP. That compulsory super flow can be tapped for growth capital if required, and buying back the UK listing in no way constrains BHP growth or acquisition options.

The other beauty of this idea is that it reduces risk, because BHP would be investing in the asset it knows best: itself. BHP has the greatest suite of mining assets in the world, yet the dual listing is contributing to those assets being priced as some of the cheapest in the world.

I know there are tax issues in unwinding the dual-listing structure, but I believe they could be overcome. I believe this must happen, and although I am out of line telling the BHP board what to do, I am certain that if they followed the advice above that BHP would be a $A50 stock in three years time, trading on P/E multiple of 13 times. Today, we have the greatest mining company in the world trading on a single-digit P/E, with that P/E actually contracting.

The stock is basically trading at net present value ”” and that's in the middle of a commodity "super cycle". Action is required to rectify that ridiculously low rating, a rating that clearly doesn't reflect the quality or duration of the assets, the quality of the management and board, or the quality of the balance sheet and cash flows.

I'm a bit passionate about this because I believe there is huge value to be released here, and I believe a much better rating can be achieved for BHP Billiton. I'm certain BHP is considering all these options, I'm just urging directors to get on with it and back themselves. It's now or never boys, let’s take out the Poms and bring it home.

Eureka Report

 

[MiningGuru]

"BHP Billiton likely to unveil big jump in Olympic Dam resource estimate - report "

"SYDNEY (XFN-ASIA) - BHP Billiton Ltd is expected to reveal a major increase in the resource estimate at it Olympic Dam copper/uranium orebody in South Australia, reported the Age newspaper without citing sources.

The new resource estimate for the deposit is expected to be included in BHP's 2005-06 annual report, due to be released in the week starting Sept 18, according to the report.

The resource estimate was last updated in 2004.

Even without the expected increase, Olympic Dam already ranks as the world's fifth biggest copper resource and the number one uranium deposit.

While the resource upgrade would push the deposit up the ranks of copper deposits, the Age said it is the expected hike in the uranium resources that will create most interest.

Olympic Dam already accounts for 40 pct of the world's known uranium resources, with 1.524 mln metric tons of the radioactive material.

The newspaper said since acquiring the project's former owner WMC Resources Ltd last year for 9.2 bln aud, BHP has carried on with the aggressive drilling program involving 18 drill rigs aimed at determining the size of Olympic Dam.

Results from the drilling are being fed into a pre-feasibility study, due to be completed at the end of 2007, which assesses a 7-10 bln aud expansion of Olympic Dam that would triple current annual production of copper and uranium to 600,000 tons and 15,000 tons respectively."

 

[nizar]

"BHP Billiton likely to unveil big jump in Olympic Dam resource estimate - report "

"SYDNEY (XFN-ASIA) - BHP Billiton Ltd is expected to reveal a major increase in the resource estimate at it Olympic Dam copper/uranium orebody in South Australia, reported the Age newspaper without citing sources.

The new resource estimate for the deposit is expected to be included in BHP's 2005-06 annual report, due to be released in the week starting Sept 18, according to the report.

The resource estimate was last updated in 2004.

Even without the expected increase, Olympic Dam already ranks as the world's fifth biggest copper resource and the number one uranium deposit.

While the resource upgrade would push the deposit up the ranks of copper deposits, the Age said it is the expected hike in the uranium resources that will create most interest.

Olympic Dam already accounts for 40 pct of the world's known uranium resources, with 1.524 mln metric tons of the radioactive material.

The newspaper said since acquiring the project's former owner WMC Resources Ltd last year for 9.2 bln aud, BHP has carried on with the aggressive drilling program involving 18 drill rigs aimed at determining the size of Olympic Dam.

Results from the drilling are being fed into a pre-feasibility study, due to be completed at the end of 2007, which assesses a 7-10 bln aud expansion of Olympic Dam that would triple current annual production of copper and uranium to 600,000 tons and 15,000 tons respectively."

Yes i read somewhere BHP will have 1million tonnes of copper production by 2010 and 40ktones of uranium....

WMC takeover seems like the bargain of the century so far... Olympic Dam is potentially worth as much as BHP's current market cap

And dont forget they also have an oil division (BHP Petroleum) which is bigger than WPL....

Uranium+oil = u cant really go wrong

IMO of course...

 

[ducati916]

Not forgetting that BHP's copper mining property is currently involved in a bitter and continued strike with mine workers, BHP is currently overvalued, and while disrupted supply may not reflect in this Q's earnings, they will reflect at some point.

And the previously posted analysis;

Current Price $39.91
Code BHP
Yield 1.1%
Market Capitalization $128150
TCI Price Target $18.70 to $13.80
Investment Sector Industrial Metals & Minerals
Price/Earnings ratio 18.73
Recommendation Watch List


INDUSTRY STATISTICS

Market Capitalization: 360B
Price / Earnings: 15.6
Price / Book: 5.2
Net Profit Margin 16.7%
Price To Free Cash Flow -87.0
Return on Equity: 32.6%
Total Debt / Equity: 0.5
Dividend Yield: 1.5%


Resources, commodity prices have been at historic highs just recently. With prices for the producers of commodities currently so high we must take into account the “cyclical” nature of the businesses involved.
We must ascertain whether the P/E ratio is derived from high earnings due to high prices received for production, or, a low purchase price available for the aggregate earnings over a number of business cycles.

To date the earnings have risen on high prices, and this has already more than been reflected within the prices asked for within the industry. This can further be illustrated within the low current dividend yield.

Purchasing this industry implies continued growth within China & other developing nations.
Is this current growth rate sustainable?
There will be many opinions upon that crucial question, but, the answers are all speculative, and if wrong, could find a very nasty correction in the prices of resource stocks. This has already happened in May, and currently the question remains, after the correction, have the prices become cheap, or undervalued?
The unequivocal answer is no. They are still as a sector overvalued.


CAPITALIZATION

Market Cap (intraday): 116.89B
Enterprise Value (19-Jun-06) 129.64B
Trailing P/E ( intraday): 15.08


The Capitalization structure of BHP is an unqualified good.
The debt, constituting both funded debt & Bank debt is a very small component of the Capitalization.
Further, the Pension & Operating Leases component is currently showing a surplus from my estimations.

Income Statement
Revenue 32.20B
Revenue Per Share 10.64
Qtrly Revenue Growth 9.70%
Gross Profit 10.09B
EBITDA 13.08B
Net Income to Common 7.80B
Diluted EPS 2.56
Qtrly Earnings Growth 55.10%


The coverage of Interest payments is excellent, and poses little risk to holders of debt, or of equity.
We can see the result of the current high prices of commodities reflected within the two ratios of “revenue growth” and “earnings growth”.

A 9.70% growth in Revenue, contrasted with a 55.1% growth in Earnings. Should commodity prices weaken, and commodity prices are very cyclical, we would see a significant shrinkage within earnings as a result, with a concurrent shrinkage in Revenues.

Due to the lack of leverage within the Balance Sheet, and the high percentage of Common, the expectation would be for a low volatility within the share price. This until just recently was the case. It has not been the case over the past two years.

There has also been a significant improvement to net profit due to a reduction in production costs, quite possibly due to economies of scale. There has additionally been a significant improvement within Selling General & Administration, costs falling. These are both positives, but sustainability is a concern.

Balance Sheet
Total Cash 1.65B
Total Cash Per Share 0.546
Total Debt 10.47B
Total Debt/Equity 0.495
Current Ratio 1.092
Book Value Per Share 6.98


Cash is lower currently than one would like to see. This in of itself is not a major problem, as of course the ability to borrow cash would be forthcoming, and undoubtedly, BHP, would have a credit revolver available.
The Current Ratio however is not high enough to qualify BHP as “Investment Grade” currently.

Inventory & Receivables display no red flags, and pass muster.
The collections of Receivables is possibly a little low, but is consistent, this will be monitored.

BHP however does not pass muster on the return generated on assets. With the current high prices that are being paid for commodities, a return of $0.97 on each invested $1.00 is indicative of a low return business.


Cash Flow Statement
Operating Cash Flow 10.04B
Levered Free Cash Flow 8.27B


Cash-flow analysis throws up some interesting areas.
Depreciation is the problem child. As a percentage of Revenues, Depreciation has fallen from an aggregate of 8.9% to 6.6%. This will after Tax, flow to the bottom line, improving net profit growth, this is some $0.13 cents per share.

Capital Expenditures have fallen quite significantly, some $0.77 per share from the aggregate.
Depreciation compared to Capital Expenditures has also decreased.
Depreciation to Cash from Operations……..fallen.
Depreciation as a percentage of Net Assets………..fallen

What we are left with does not look confidence inspiring currently, especially as we are not even purchasing a bargain, thus we have no margin of safety.

We have reduced Capital Expenditures, thus pumping up net profits.
We have reduced Depreciation being charged against Net Assets, pumping up profits.
In short, there may very well be reduced investment, or more importantly reduced, or inadequate spending on maintenance to pump up earnings.

Examination from a different perspective reveals nothing that allays any concerns.
%growth in Capital Expenditures = 30.7%
%growth in Plant Property & Equipment = 24.3%
%growth in Depreciation = 9.8%

When we compare this to the following;

%growth in Revenues = 22.8%
%growth in Gross Profits = 34.3%

It would seem that the Depreciation charge is being inappropriately rated. This is always a red flag, and may pose problems further down the road. At current prices, it is certainly enough of a question to apply prudence to the investment decision.

The Depreciation or Depletion charge carries an extra importance within the purchase of the common stock of a resources business. The Depreciation charged by the business cannot be the depreciation charge utilized by the individual investor, as of course, the business charges depletion at purchase price, and so must the investor.

Utilizing a pessimistic outlook, and diminishing productive capacity after seven years, the investors return would calculate to 4.5%. This is inadequate, and provides no margin of safety at all.

Utilizing a generous twenty years on productive capacity, we still have only a 6.7% return. For this return, a lot of things would need to move in the investors favor.

MANAGEMENT

Looking at hidden Cash-flows we can identify a discretionary Cash-flow of $295.9 million, or $0.09 per share within Selling General & Administration. This in of itself is generally a positive, as these cash-flows may well be available to the business in harder business cycles.

There is however a discretionary Cash-flow within Capital Expenditures also, calculated to be approximately $593.8 million, or $0.19 per share. Under the present question marks present regarding the Depreciation charge, I am not willing to look at this as a positive, if; in point of fact maintenance spending has suffered.

SUMMARY

BHP is considered a “Blue Chip” business, or share. In my opinion, the business is profitable, but has a very low return. It has some serious question marks in regards to the Depreciation charges and related questions regarding the outcome of Capital Expenditure spending.

At the current price, it is too expensive, and returns accruing to the investor, purchased at these prices will reside almost entirely on speculative outcomes. Will commodity prices remain at 25 year highs? Will China & other developing nations continue their extreme growth rates?

If you do not know the answers to these questions, then BHP is a watch list security. Should prices fall to circa $8.00 then there will be enough value available to warrant an investment with “Fair Value” calculated at the range of $18.70 to $13.80 per share.

--------------------

 

[ducati916]

And a quote from Reuters

This was supposed to be a week in which BHP Billiton (nyse: BBL - news - people ) announced another breathtaking set of annual results. Instead, the Anglo Australian metals and mining giant woke up Monday morning to the 15th day of a prolonged strike at its biggest copper mine in Chile--and it doesn't look likely to end any time soon.

Copper prices jumped just over 2% on Monday after BHP said operations at Escondida, the world's largest privately owned mine, was running at between 40% and 60% operating capacity. The company is still waiting for the official results of a worker vote on its latest wage offer: a 4% pay rise over three years.

But the mine workers and their union have already told the press that they're rejecting the offer. Pedro Marin, the union spokesman, has said the workers cannot accept a further reduction of their initial demands. Having originally asked for a 13% rise in wages, they are now holding out for a 10% raise.

About 2,000 workers covered by the contract--which expired Aug. 1--are on strike. That has left a combination of contractors and non-unionized employees to continue working at the mine. From Tuesday, the workers will be allowed under Chilean labor law to return to work, even if the strike continues, and negotiate their individual contracts directly with the company.

Operations at Escondida represent 17.3% of BHP's annual profit and revenue. In the half year ended Dec. 31, 2005 it brought in underlying earnings of $1.16 billion. BHP said that the current strike as yet had not impacted its customers but said it may affect the timing of deliveries.

The last time the union's contract was negotiated in 2003, copper cost a fifth of $3.48 it trades at today. Like other industrial metals, enormous demand from China and other developing economies is making copper attractive to investors.

Analysts have duly been expecting that BHP will smash its record with net profits of $10 billion this Wednesday, and rumor has it the company is poised to announce a $3 billion share buyback. Along with BHP, which has a 57.5% stake in it, the mine is part-owned by its competitor Rio Tinto, which has a 30% stake, and about 10% is held by a consortium led by Mitsubishi (other-otc: MSBHF - news - people ) .

Shares in BHP rose 1.7% to close at £10.50 ($19.89) on Monday trading on the London Stock Exchange. Later in New York, the company’s American depositary receipts, which represent two common shares, traded up 2.5%, at $43.89, or nearly £11.58. The advance was probably due to rumors of a special dividend--reflecting growing demand for industrial minerals--rather than the developments in Chile.

The increase in copper prices following news of the strike seems more a nudge than a jump, probably because investors had factored in Escondida's industrial action. But it is lengthy nature of the strike which is said by some analysts to be unusual, particularly in Chile. Workers are said to be intent on holding out on their demands because the rise in copper prices has been so dramatic. That seems rather a quirk of fate for BHP.

 

[Sean K]

Should prices fall to circa $8.00 then there will be enough value available to warrant an investment with “Fair Value” calculated at the range of $18.70 to $13.80 per share.

$8.00 Ducati? Is that your valuation? Or is between $13 and $18, yours??

What p/e would $8.00 put it at, about 2%? LOL

 

[ducati916]

Kennas

Fair value resides somewhere between $13 & $18
I personally would only be interested at $8/or less
The reason of course is that I must have some discount from fair value to provide me with a margin of safety and profit potential.

jog on
d998

 

[Sean K]

ducati, I haven't seen a valuation under $32.00 for some time. Suppose brokers can't get it right all the time.

In 'concensus best buys' on Aegis, 15 brokers have been pannelled and one says hold, eight say buy, and six say strong buy. At current prices!

Holy goat, their members will be taking a flogging after your valuation comes to fruition.

 

[Realist]

Fair value resides somewhere between $13 & $18
I personally would only be interested at $8/or less
The reason of course is that I must have some discount from fair value to provide me with a margin of safety and profit potential.

ridiculous


"The world's largest diversified miner BHP Billiton Ltd has posted an Australian record annual net profit of $US10.45 billion ($A13.73 billion), and says the global economic outlook continues to be positive."


At $8 a share the market cap is about $27B.

The company would have a PER of about 2.

Hahahahahahaahahahahaahaaaaaaaaaaaaaaaaaaaaaaaa

Stupidity at its best. Ducati - you've outdone yourself this time!

 

[Joe Blow]

Realist, using font sizes larger than normal for no reason will cause me to get very cranky.

Don't do it.

 

[wayneL]

Well I like the Ducsters valuation.

It would be primo investment grade at those prices. As is stands, most of the valuation is speculative... and based on speculative prices in metals.

When the heat comes out of both the ecomomy and commodity prices, the BHP share price is toast.

 

[MiningGuru]

Look at this. The idea that is going to go down in price to $8 is absolute fantasy! It is more likely going to go up to $40+ by the end of the year.

Matthew Stevens: Best is yet to come
Matthew Stevens
August 23, 2006
THE really scary thing about BHP Billiton's record crunching profit of $US10.45billion is that we haven't really seen the best of it yet.

Now how can that be?

Well, just look back at last month's annual production report and note that over the past 12 months BHP has pretty much kept pace or slightly bettered its 2005 output of key products like iron ore, copper, aluminium and petroleum.

Overall then, the unreal set of numbers Chip Goodyear delivered to the market this afternoon reflect little more than the once-in-a-lifetime price cycle which has so changed life for the miners.

But that is about to change. Over the past 18 months BHP has spent $US1.45 billion on four, fast-tracked expansion projects in aluminium, copper and iron ore.

So, for the first time in the super cycle, BHP is going to start responding to demand by pumping out serious new tonnages across three of the biggest profit generators in its suite of metals and minerals.

It has, just for example, spent $US490 million adding 20 million tonnes of capacity to its West Australian iron ore operations. BHP earned $US4.5 billion from its steel materials business this year, an increase of 28 per cent over the previous year. But that was done off flat iron ore production. The impact then of a serious increase in production, which is expected to start in the second half of this year, will be profound.

And that is the story across the board. Frighteningly enough, Chip Goodyear is only now going to put his foot on the accelerator.

» Print Friendly Version » Email this story

Privacy Terms © The Australian

 

[Realist]

Wayne, if BHP was $8 now.

The Market cap would be about $27B.

The recent profit was $13.5B

The PE ratio would be 2.

And if things did not change you would make your money back in 2 years, and hold one of Australia's and indeed the world's greatest companies for free.

It is utter lunacy to say the least. If anything BHP is undervalued now because analysts, and shareholders and punters alike know things do not get much better than they are now.

BHP is a buy at the current price, it is one of the best companies in the world, and not overvalued because a future reduction in resource prices are already accounted for.

 

[wayneL]

Wayne, if BHP was $8 now.

The Market cap would be about $27B.

The recent profit was $13.5B

The PE ratio would be 2.

And if things did not change you would make your money back in 2 years, and hold one of Australia's and indeed the world's greatest companies for free.

It is utter lunacy to say the least. If anything BHP is undervalued now because analysts, and shareholders and punters alike know things do not get much better than they are now.

BHP is a buy at the current price, it is one of the best companies in the world, and not overvalued because a future reduction in resource prices are already accounted for.

You should buy some then.

I'll trade it, but only scrip that I can get at value goes into the bottom drawer.

 

[Realist]

Good article Miningguru, there is no reason why BHP can not increase profits this year.

$40 is not an unrealistic current valuation IMHO.

Let's see how it does tomorrow.

I have alot of BHP shares, more so than any other company. But I am not being biased or ramping it here (as if it would matter to the price if you all bought) it is truly a remarkable company. The recent results are stunning, and the future is bright.

 

[Realist]

You should buy some then.

I'll trade it, but only scrip that I can get at value goes into the bottom drawer.

I own more BHP than any other shares*, infact twice as much as any other share.

I have about 20 shares at the moment.

*except one Nasdaq stock..

 

[wayneL]

I own more BHP than any other shares*, infact twice as much as any other share.

I have about 20 shares at the moment.

*except one Nasdaq stock..

You only have 20 shares? You should buy some more then.

 

[Realist]

You only have 20 shares? You should buy some more then.

19 actually.


but that is 19 more than you...

:fu:

 

[michael_selway]

You should buy some then.

I'll trade it, but only scrip that I can get at value goes into the bottom drawer.

Im with you, quite bearish on BHP actually, but not overly

They annouced results today and it fell today

Basically for Resources companies to do well from this point onwards, they have to be leveraged to the right resources

E.g. specialist in Nickel, Zinc, Uranium

But BHP isnt specialsit in these % wise

I value BHP using forward terminal PE of 10 about so $27

Yes it can spike to $40 in the short term, but long term it wise it should be around $27 based on current forecasts and risks etc

Earnings and Dividends Forecast (cents per share)
2005 2006 2007 2008
EPS 128.4 223.7 290.9 268.8
DPS 36.7 48.8 54.5 56.6

thx

MS

 

[wayneL]

19 actually.


but that is 19 more than you...

:fu:

Is that so.... Thank you for alerting me to my financial position. I never realised!

:guitar: