wayneL
VIVA LA LIBERTAD, CARAJO!
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Realist said:I was kidding about the 19.
You can't even buy only 19 if u wanted to.
I have well over $10,000 in BHP.
Will you buy more when they're worth $4,000?
BHP - BHP Group
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Will you buy more when they're worth $4,000?
Realist
Billie Jean is not my lover
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wayneL said:Will you buy more when they're worth $4,000?
Wayne, if BHP end up at $5 a share or whatever Ducati valued them at.
Then YES I sure as hell would buy alot.
I think I've already been quoted as saying I'd sell my eye teeth, my mother and the clothes off my back to buy BHP if it had a PER of 2.
michael_selway
Coal & Phosphate, thats it!
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Realist said:
Hi Real, i think BHP is worth about $25 now
basically Forward Terminal PE of 10, although yield is a bit low relatively
Earnings and Dividends Forecast (cents per share)
2006 2007 2008 2009
EPS 225.4 291.8 268.8 239.9
DPS 48.4 54.4 57.0 56.4
thx
MS
Out Too Soon
My real name is King Julian ;)
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Thanks for that Alan Kohler, Chip Goodyear (BHP) interview MIchael. It was Alan on TV recently who told viewers that "if you invested every May & sold in Nov over the last 50 years (avg ASX 100 or somesuch I forget details) you'd have actually lost money, but if you bought in November & sold in May you'd be up an incredible (once again I forget details pls forgive) I think it was $500K from an initial start of $1000", but dont hang me if that's all screwed up. The gist of it was though & these details r what I scribbled down at the time, "Sell in May go away (until November), Buy in November".
Realist
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nizar said:
YES!!
Lets use BHP as an example, if it makes an even bigger profit next year, and even bigger profit the year after and the future looks even better the market MAY react positively and the share price MAY increase.
The market interprets results, that is all. People make judgements and they are wrong as often as they are right. History proves that succesfull companies that make large profits have a share price that increases. Companies that have reducing profits or god forbid losses have share prices that decrease.
You can not control market sentiment, or even predict it. But you can use it to your advantage. If you buy a successfull company for a discounted price you have a far better chance of getting a share that will go up. The longer you hold and the more successfull a company is, the greater your chances. In the meantime you collect in all likliehood ever increasing dividends.
There is no other way to invest, any other way is gambling IMHO.
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Firstly, why is this thread so short and seldom at the top?
Beware: Rant Follows!
BHP is our largest company and in my view an outstanding company with stunning prospects. Liquid, volatile, transpearant, widely researched, globally traded, going up etc - why dont people discuss BHP more?
Blunty, I think resources are the place to be on the ASX outside of financials.
I believe there is a pervasive feeling globally that discounts the commodities sector in general and potential for a bull market lasting in excess of a decade. Attitudes will change and I think BHP is great value now.
In Australia, this doubt, in my view is based on so many living through the 90s bear market, laterite nickels, Magma Copper etc not believing the current prices and expecting for some reason to see a reversion to the mean for prices. Resources booming must be a bubble say those who were bitten by rubbish stock in the tech boom.
This mindsite prevails despite rising cost curves for production (particularly at lower grades, greater depth for everything) and ever rising demand.
The IMF has stated recently that commodity demand will grow at 5% next year - despite US housing and the potential for recession. A housing slump in Florida is not going to stop the expansion of the Chinese electricity grid and it is not going to stop copper, nickel or oil getting less prevalent and harder to find.
I have read back on this thread to October when at $19.50 punters were selling it on technicals.
My interest however is in the fundamental calls and particularly those with values sub $15. These all appear to be based on the premise that copper, iron ore and oil prices will fall at a rapid pace. The same pace the metals bears have been wrongly calling for over twelve months.
The wave of supply is yet to eventuate and the demand has only risen.
The cyclical nature of the business is always referred to - but no one contemplates that the cycle may be 15 years and not 3.
Why can house prices double in five years and not resources? It takes ten years to build a copper mine and three months to build a home.
BHP offers both leverage to rising commodity prices AND rising production growth of production
BHP is generating massive cashflow
The sustainability of Asian demand is driven by demographics and from a very low base. A far superior engine to that of US consumers borrowing more to buy an extra burger.
BHP is underleveraged and will be cash positive by the end of the decade.
This comment from Ducati needs to be better quantified for me:
"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."
Ducati, I would thouroughly enjoy discussing your model and point to where we disagree. To value BHP at $13.80 what are your assumptions for:
Copper: 07, 08 Long Term
Nickel: 07, 08 Long Term
Coking Coal: 07, 08 Long Term
Iron Ore: 07, 08 Long Term
Oil: 07, 08 Long Term
My only criticism of BHP (and other large houses) is that they arent focussed on more buying of producers and investing in quality projects with more belief in the cycle, rather than returning capital to shareholders.
But the less they spend - the more tight supply remains.
Beware: Rant Follows!
BHP is our largest company and in my view an outstanding company with stunning prospects. Liquid, volatile, transpearant, widely researched, globally traded, going up etc - why dont people discuss BHP more?
Blunty, I think resources are the place to be on the ASX outside of financials.
I believe there is a pervasive feeling globally that discounts the commodities sector in general and potential for a bull market lasting in excess of a decade. Attitudes will change and I think BHP is great value now.
In Australia, this doubt, in my view is based on so many living through the 90s bear market, laterite nickels, Magma Copper etc not believing the current prices and expecting for some reason to see a reversion to the mean for prices. Resources booming must be a bubble say those who were bitten by rubbish stock in the tech boom.
This mindsite prevails despite rising cost curves for production (particularly at lower grades, greater depth for everything) and ever rising demand.
The IMF has stated recently that commodity demand will grow at 5% next year - despite US housing and the potential for recession. A housing slump in Florida is not going to stop the expansion of the Chinese electricity grid and it is not going to stop copper, nickel or oil getting less prevalent and harder to find.
I have read back on this thread to October when at $19.50 punters were selling it on technicals.
My interest however is in the fundamental calls and particularly those with values sub $15. These all appear to be based on the premise that copper, iron ore and oil prices will fall at a rapid pace. The same pace the metals bears have been wrongly calling for over twelve months.
The wave of supply is yet to eventuate and the demand has only risen.
The cyclical nature of the business is always referred to - but no one contemplates that the cycle may be 15 years and not 3.
Why can house prices double in five years and not resources? It takes ten years to build a copper mine and three months to build a home.
BHP offers both leverage to rising commodity prices AND rising production growth of production
BHP is generating massive cashflow
The sustainability of Asian demand is driven by demographics and from a very low base. A far superior engine to that of US consumers borrowing more to buy an extra burger.
BHP is underleveraged and will be cash positive by the end of the decade.
This comment from Ducati needs to be better quantified for me:
"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."
Ducati, I would thouroughly enjoy discussing your model and point to where we disagree. To value BHP at $13.80 what are your assumptions for:
Copper: 07, 08 Long Term
Nickel: 07, 08 Long Term
Coking Coal: 07, 08 Long Term
Iron Ore: 07, 08 Long Term
Oil: 07, 08 Long Term
My only criticism of BHP (and other large houses) is that they arent focussed on more buying of producers and investing in quality projects with more belief in the cycle, rather than returning capital to shareholders.
But the less they spend - the more tight supply remains.
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BSD
I shall relish the discussion.
Check back to this thread later today, as I have some business to attend to early, and I would like to give some thought to your points of differences and objections.
jog on
d998
I shall relish the discussion.
Check back to this thread later today, as I have some business to attend to early, and I would like to give some thought to your points of differences and objections.
jog on
d998
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BSD
Let's examine the macro/micro fundamentals.
The questions below pertain to both.
From BHP's 2005 Annual Report;
*Petroleum +38.9%
*Aluminium +26.5%
*Base Metals [Copper, Lead, Zinc, Gold, Silver, Uranium Cathode] +221.8%
*Carbon Steel [Iron Ore, Magnesium, Metallurgical Coal] +127.8%
*Diamonds + Specialty -7.9%
*Energy Coal +206.9%
*Stainless Steel +47.7%
Are these types of increases sustainable?
This question must be addressed in two stages;
*Macro-view, viz. global supply/demand dynamics
*Balance Sheet, viz. Accounting policies.
Balance Sheet.
BHP utilizes FIFO accounting for Inventory.
FIFO, in an environment of rising prices, leverages net profit.
FIFO in an environment of stable, or falling prices, causes losses on Inventory.
Therefore, unless prices for Inventory continue to rise, net profits will fall.
Looking at the percentage increases within Inventory pricing, can you envisage further increases of a similar, or increasing magnitude?
If not, then, as prices stabilise and weaken, so FIFO will impact net earnings.
We can calculate this from the Depreciation charge.
Therefore, from a Balance Sheet analysis, we can surmise that the earnings growth could have a fatal flaw that is currently under-appreciated.
From a macro-perspective;
The US & China are symbiotic economies currently.
China can only consume 42% of their own output [this is a very small consumption]
They thus rely on the rest of the OECD bloc to take the surplus production.
The US accounts for some 68% of the 58% surplus.
Walmart alone accounts for 30% of the US 68%
Now supposing China did not cycle the FX surplus back to the US via the purchase of Treasuries? Could, would the US continue to purchase Chinese manufacturing output?
Protectionism is very strongly on the rise through Congress & Senate working parties, you need only look at various mergers that were blocked recently.
Trade tarriffs, etc are again a fact of global trade, thus, should China NOT support the US consumer, the US consumer would possibly be denied the opportunity to purchase from China just in case they would still wish to, or could afford to.
China is still a managed economy.
It is managed locally with great inefficiencies and wasted capital.
In China, it has led to massive overinvestment in manufacturing assets in sectors already suffering from oversupply. Investment in fixed assets -- everything from steel mills to cement plants to oil refineries to highways -- grew by 30% in the first half of 2006.
Although the reported profits of China's largest industrial enterprises climbed 28% in the first half of 2006 over the same period in 2005, companies in some sectors have seen profits squeezed, sometimes to the vanishing point. According to government numbers, 80% of the profits in the Chinese economy went to companies in the oil, power, coal and nonferrous metals sectors. The other 30 sectors of the economy shared just 20% of corporate profits.
Profits in the Steel sector dropped by 20% in the first half of the year. The problem is overcapacity. Too many steel companies have added too much capacity, driving down the price they can charge for their product.
Cheap money in plentiful supply has produced a real estate boom in China, too. Higher prices pull more money into real estate, of course. In the first six months of 2006, real estate investment climbed 24.2% over the same period in 2005. According to the National Bureau of Statistics, 1.41 billion square meters of housing were built from January through June 2006, up 21% from 2006.
China needs GDP growth north of 7% a year just to stay even with the number of new job seekers thrown up by its massive population every year.
A purely rational economic analysis would say that if Chinese textile makers can't compete after the yuan is appropriately revalued, then the least-efficient companies in the sector should go out of business and the jobs should flow to countries, perhaps Vietnam, where lower labor costs would allow textile makers to make a profit.
That would mean shipping jobs out of China, however, and advocating that is political death in a country that needs to create 20 million jobs a year to keep the population governable by the Communist regime.
Therefore, it would seemingly be economic suicide to dampen demand from the US via refusal to fund the deficit in trade. The second part of the equation being, how much of the infra-structure, & productive assets belong to US Corporations via their FDI investments?
Just because the profits are not being repatriated due to tax reasons, does not mean the profits are not accruing to Corporate America.
With such a large component of listed Australian stocks having their earnings seemingly dependent upon Chinese demand, how will Australia weather a recession in China?
China has huge reserves of coal.
They are switching their power generation from oil & imported coal to home produced coal. This will impact the price of coal, particularly if they become net exporters.
Iron ore, with a steel glut already, and getting worse, demand from China will decrease, again, not promising for BHP.
China is the margin economy.
Prices are always set at the margin.
The margin is currently evolving.
In the longer term, I see prices returning to the equilibrium.
So what are those prices?
From RIO's Annual Report;
Alumina
Low price $250
Current price $420
Aluminum
Low price $55
Current price $90
Coking Coal
Low Price $45
Current price $130
Thermal Coal
Low price $35
Current price $55
Copper
Low price $75
Current price $160
Diamonds
Low price $150
Current price $200
Gold
Low price $350
Current price $550
Iron Ore
Low price $35
Current price $80
Iron Pellets
Low price $45
Current price $120
Molybdenum
Low price $5
Current $30
Silver
Low price $5
Current $7
"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."
Therefore, intrinsic value is in a range between $13.50 - $18.70.
For an UNDERVALUATION I recommend buying at least 50% below this range. At $8.00, BHP would enter the undervaluation, or bargain area.
jog on
d998
Let's examine the macro/micro fundamentals.
The questions below pertain to both.
From BHP's 2005 Annual Report;
*Petroleum +38.9%
*Aluminium +26.5%
*Base Metals [Copper, Lead, Zinc, Gold, Silver, Uranium Cathode] +221.8%
*Carbon Steel [Iron Ore, Magnesium, Metallurgical Coal] +127.8%
*Diamonds + Specialty -7.9%
*Energy Coal +206.9%
*Stainless Steel +47.7%
Are these types of increases sustainable?
This question must be addressed in two stages;
*Macro-view, viz. global supply/demand dynamics
*Balance Sheet, viz. Accounting policies.
Balance Sheet.
BHP utilizes FIFO accounting for Inventory.
FIFO, in an environment of rising prices, leverages net profit.
FIFO in an environment of stable, or falling prices, causes losses on Inventory.
Therefore, unless prices for Inventory continue to rise, net profits will fall.
Looking at the percentage increases within Inventory pricing, can you envisage further increases of a similar, or increasing magnitude?
If not, then, as prices stabilise and weaken, so FIFO will impact net earnings.
We can calculate this from the Depreciation charge.
Therefore, from a Balance Sheet analysis, we can surmise that the earnings growth could have a fatal flaw that is currently under-appreciated.
From a macro-perspective;
The US & China are symbiotic economies currently.
China can only consume 42% of their own output [this is a very small consumption]
They thus rely on the rest of the OECD bloc to take the surplus production.
The US accounts for some 68% of the 58% surplus.
Walmart alone accounts for 30% of the US 68%
Now supposing China did not cycle the FX surplus back to the US via the purchase of Treasuries? Could, would the US continue to purchase Chinese manufacturing output?
Protectionism is very strongly on the rise through Congress & Senate working parties, you need only look at various mergers that were blocked recently.
Trade tarriffs, etc are again a fact of global trade, thus, should China NOT support the US consumer, the US consumer would possibly be denied the opportunity to purchase from China just in case they would still wish to, or could afford to.
China is still a managed economy.
It is managed locally with great inefficiencies and wasted capital.
In China, it has led to massive overinvestment in manufacturing assets in sectors already suffering from oversupply. Investment in fixed assets -- everything from steel mills to cement plants to oil refineries to highways -- grew by 30% in the first half of 2006.
Although the reported profits of China's largest industrial enterprises climbed 28% in the first half of 2006 over the same period in 2005, companies in some sectors have seen profits squeezed, sometimes to the vanishing point. According to government numbers, 80% of the profits in the Chinese economy went to companies in the oil, power, coal and nonferrous metals sectors. The other 30 sectors of the economy shared just 20% of corporate profits.
Profits in the Steel sector dropped by 20% in the first half of the year. The problem is overcapacity. Too many steel companies have added too much capacity, driving down the price they can charge for their product.
Cheap money in plentiful supply has produced a real estate boom in China, too. Higher prices pull more money into real estate, of course. In the first six months of 2006, real estate investment climbed 24.2% over the same period in 2005. According to the National Bureau of Statistics, 1.41 billion square meters of housing were built from January through June 2006, up 21% from 2006.
China needs GDP growth north of 7% a year just to stay even with the number of new job seekers thrown up by its massive population every year.
A purely rational economic analysis would say that if Chinese textile makers can't compete after the yuan is appropriately revalued, then the least-efficient companies in the sector should go out of business and the jobs should flow to countries, perhaps Vietnam, where lower labor costs would allow textile makers to make a profit.
That would mean shipping jobs out of China, however, and advocating that is political death in a country that needs to create 20 million jobs a year to keep the population governable by the Communist regime.
Therefore, it would seemingly be economic suicide to dampen demand from the US via refusal to fund the deficit in trade. The second part of the equation being, how much of the infra-structure, & productive assets belong to US Corporations via their FDI investments?
Just because the profits are not being repatriated due to tax reasons, does not mean the profits are not accruing to Corporate America.
With such a large component of listed Australian stocks having their earnings seemingly dependent upon Chinese demand, how will Australia weather a recession in China?
China has huge reserves of coal.
They are switching their power generation from oil & imported coal to home produced coal. This will impact the price of coal, particularly if they become net exporters.
Iron ore, with a steel glut already, and getting worse, demand from China will decrease, again, not promising for BHP.
China is the margin economy.
Prices are always set at the margin.
The margin is currently evolving.
In the longer term, I see prices returning to the equilibrium.
So what are those prices?
From RIO's Annual Report;
Alumina
Low price $250
Current price $420
Aluminum
Low price $55
Current price $90
Coking Coal
Low Price $45
Current price $130
Thermal Coal
Low price $35
Current price $55
Copper
Low price $75
Current price $160
Diamonds
Low price $150
Current price $200
Gold
Low price $350
Current price $550
Iron Ore
Low price $35
Current price $80
Iron Pellets
Low price $45
Current price $120
Molybdenum
Low price $5
Current $30
Silver
Low price $5
Current $7
"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."
Therefore, intrinsic value is in a range between $13.50 - $18.70.
For an UNDERVALUATION I recommend buying at least 50% below this range. At $8.00, BHP would enter the undervaluation, or bargain area.
jog on
d998
Mining companies tend to be valued on NPV rather than multiples given the variability of cashflows and the highly capital intensive nature of the mining business
BHP's accounting policies such as FIFO have no bearing on NPV valuations - maybe a minor if not negligible impact on earnings - but studies have consistently show that the share market is driven by long term expectations not by short term earnings.
And you are only considering part of the story when you look at stability ofearnings. Prices will fall, no doubt about that. But volumes are still increasing and will be much higher than the pre-boom period. Plus there has been significant consolidation amonst the bigger producers which will lead to more "sensible" behaviour around prices and production planning when demand does cool
BHP's accounting policies such as FIFO have no bearing on NPV valuations - maybe a minor if not negligible impact on earnings - but studies have consistently show that the share market is driven by long term expectations not by short term earnings.
And you are only considering part of the story when you look at stability ofearnings. Prices will fall, no doubt about that. But volumes are still increasing and will be much higher than the pre-boom period. Plus there has been significant consolidation amonst the bigger producers which will lead to more "sensible" behaviour around prices and production planning when demand does cool
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haemitite
Assuming this to be correct, then the crucial questions revolve around the depreciation & depletion charges to;
*the company
*the investor
If this is the case, and you are stating that it is, then the Accounting policy is a vital consideration. You argue;
This is incorrect.
Incorrect.
NPV calculations revolve around the net present value of all cash-outflows [such as the cost of the investment] and all cash-inflows [returns] via a discount rate, usually a required rate of return. In theory, the investment is acceptable, if, the NPV is positive. Therefore, accounting policy [FIFO] and the Depreciation policy, which includes Depletion, becomes probably one of the most important considerations when analyzing resouce producers.
Even more importantly, the investor should calculate his own depletion and amortization rates based on the purchase price.
Acceptable, and providing a Valuation, are two very different concepts.
Therefore your premise, and your subsequent assertions miss the point entirely due to the fundamental mistake of marginalising the relevence and importance of accounting policy.
We then move on to your next assertion;
This rather glib opinion seemingly relies more upon convenience, than penetrating thought. Therefore;
*what studies [reference]
*context of the studies
*in what market period were they completed
*have follow up studies been completed
*do the follow up studies confirm the findings of the initial studies
*are the studies consistent across all timeframes
*are the studies consistent across all market participants
Moving on to your last section;
We can summarize the above into a simple equation;
Earnings = Production + Price received - Costs
You state;
*prices will fall
*volume will increase
*costs......not mentioned or considered.
If price falls, the falling price will leverage the drop in net earnings, due to accounting policies.
An outright prediction of increasing volume is utilized to justify the offset to falling prices. This is a dangerous assumption. It may in point of fact be correct, but, then again, it may be incorrect.
This leads to two further questions;
*if correct, how much additional volume would be required to offset the fall in price
*if incorrect, how would the following impact;
*leveraged falls in net profit
*dispersion between fixed & variable costs [what would this do to margins]
The analyst, must therefore, by definition now look at the macro-economic picture of world demand for a wide range of commodities, with China, currently a managed economy, this is near an impossible task, as they may subsidise losses indefinitely or, they may not. Europe, with 33% of demand, is hardly an easy call. There is no singly agreed policy, therefore, you would need to look at some 15 to 20 individual economies.
Last point;
Now the contradiction.
After waffling about increasing demand, we have, ......falling demand. We can therefore discount the notion that you have even a vague idea.
Acquisitions on aggregate, destroy shareholder value.
The destruction of shareholder value revolves around, poor acquistions due to excessive prices being paid, faulty premises of the acquisition etc.
As a potential shareholder, you stand to lose in the face of the institutional imperitive......which is a whole new topic.
jog on
d998
Assuming this to be correct, then the crucial questions revolve around the depreciation & depletion charges to;
*the company
*the investor
If this is the case, and you are stating that it is, then the Accounting policy is a vital consideration. You argue;
This is incorrect.
Incorrect.
NPV calculations revolve around the net present value of all cash-outflows [such as the cost of the investment] and all cash-inflows [returns] via a discount rate, usually a required rate of return. In theory, the investment is acceptable, if, the NPV is positive. Therefore, accounting policy [FIFO] and the Depreciation policy, which includes Depletion, becomes probably one of the most important considerations when analyzing resouce producers.
Even more importantly, the investor should calculate his own depletion and amortization rates based on the purchase price.
Acceptable, and providing a Valuation, are two very different concepts.
Therefore your premise, and your subsequent assertions miss the point entirely due to the fundamental mistake of marginalising the relevence and importance of accounting policy.
We then move on to your next assertion;
This rather glib opinion seemingly relies more upon convenience, than penetrating thought. Therefore;
*what studies [reference]
*context of the studies
*in what market period were they completed
*have follow up studies been completed
*do the follow up studies confirm the findings of the initial studies
*are the studies consistent across all timeframes
*are the studies consistent across all market participants
Moving on to your last section;
We can summarize the above into a simple equation;
Earnings = Production + Price received - Costs
You state;
*prices will fall
*volume will increase
*costs......not mentioned or considered.
If price falls, the falling price will leverage the drop in net earnings, due to accounting policies.
An outright prediction of increasing volume is utilized to justify the offset to falling prices. This is a dangerous assumption. It may in point of fact be correct, but, then again, it may be incorrect.
This leads to two further questions;
*if correct, how much additional volume would be required to offset the fall in price
*if incorrect, how would the following impact;
*leveraged falls in net profit
*dispersion between fixed & variable costs [what would this do to margins]
The analyst, must therefore, by definition now look at the macro-economic picture of world demand for a wide range of commodities, with China, currently a managed economy, this is near an impossible task, as they may subsidise losses indefinitely or, they may not. Europe, with 33% of demand, is hardly an easy call. There is no singly agreed policy, therefore, you would need to look at some 15 to 20 individual economies.
Last point;
Now the contradiction.
After waffling about increasing demand, we have, ......falling demand. We can therefore discount the notion that you have even a vague idea.
Acquisitions on aggregate, destroy shareholder value.
The destruction of shareholder value revolves around, poor acquistions due to excessive prices being paid, faulty premises of the acquisition etc.
As a potential shareholder, you stand to lose in the face of the institutional imperitive......which is a whole new topic.
jog on
d998
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G'day Duc
Shouldn't your last equation:
"Earnings = Production + Price received - Costs"
be --
Earnings = Production X Price received - Costs
Cheers
Dutchie
Shouldn't your last equation:
"Earnings = Production + Price received - Costs"
be --
Earnings = Production X Price received - Costs
Cheers
Dutchie
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dutchie
Yes it should..............ta!
jog on
d998
Yes it should..............ta!
jog on
d998
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Thanks for the response.
The base scenario in analysing BHP must be consensus or individual analyst forecasts. We can only really identify our personal differences with the assumptions used by the analysts and identify the effect this has on our valuations.
Addressing accounting policy and balance sheet first (which I believe has very little to do with the divergence in our valuations).
The positive effect or leverage from provisional pricing has been valued by some analysts at around $1bn (astonishing) in the previous year.
This was a large proportion of the surprises from BHP and RIO - but is not seen as sustainable (on the assumption of falling base metals in the future) and is not used in forward EPS assumptions.
Good analysts are accounting for this in their p/l numbers and individual research pieces abound on the subject. Those who were wrong this last earnings season now have a grip on this effect.
The major sensitivity in the differences between our valuations must be commodity prices and by way of direct association - world growth.
Demand
While all the fear surrounds the US consumer slowing down (as it has for the last decade), US industrial production and government spending remains strong.
People get worried about a slowdown in the rate of US growth, forgetting that under current demand conditions, there are deficits in many metals and inventories are tight. Just a steady state would see the 40% price reductions expected in commodities look silly.
I understand that China exports a lot to the US. But even if the US has a recession, the effect is not going to send China into a tailspin. The 10% GDP growth rates of the Chinese economy have not been exclusively fuelled by the US and will not be turned negative by a US slowdown.
The US is not homogenous and the banrupcty of property spivs in Florida is not going to turn the entire country into recession. The recession fear in the US maybe warranted - but it is hardly a structural long term problem.
Sydney is in a recession due to a property bubble - but the rest of Australia is not.
Industrial production is forecast to rise by 15%pa over the next three years in China, 8%pa in Asia ex-China and 8%pa in Eastern Bloc.
Metals markets in Europe are ridiculously tight at the moment - people forget Europe all the time, being fascinated by CNBC and the US markets.
The last three years metals price boom was predicated on Chinese industrial production growth of over 16% pa in 03,04 and 05.
The US IP grew at 0.6%, 4.1% and 3.0% in the same years. US IP is still forecast to grow at 2.6% in 07 and 3% in the out years.
Industrial production in copper intensive - textiles industry is not. The industialisation of the Chinese and Eastern European countries is increasing the amount of base metals they consume. The growth of intensity of demand for base metals in developed countries is benign.
The Chinese internal/external GDP split will change and which way would you expect it to go?
As the country draws more wealth from dealing overseas, the standard of living expands and the industrial intensity of their lifestyles expands exponentially.
The infrastructure being built (electiricity generation being an excellent example) in China is astonishing.
They are building massive amounts of property and infrastructure to meet demand for the tens of millions moving to cities. This process is not going to be undertaken over a period of three years - it is going to take far more than a decade.
China will have hiccups (bad debts etc) - but you are not going to slow it down for decades.
A trillion USD in the coffers can fix a lot of problems!
If (when) the Chinese stop buying USD and if (when) the yuan appreciates, the developed nations will stop importing deflation from China and will have inflation.
What do you want to own when inflation comes - commodities.
The US will not put tarriffs on Chinese goods. Despite the bluster from fools in the developed countries like the US and Australia, anyone with half a brain can see that our standards of living are not going to increase from having more factory jobs and more expensive consumables.
The Chinese are not good at allocating capital - but nor are we. Their innefficient use of capital leads to volume at all cost production with razor margins and ours leads to bottlenecks and the inability to funds infrastructure required to exploit opportunities. A match made in heaven!
Supply
A decade of underinvestment is leading to a benign supply response.
BHP and RIO are doing buy backs instead of exploration. The big boys are buying supply and not exploring. This is completely different from previous cycles.
The management consultants focus on EPS growth during their contracted employment and recommend buy backs and capital returns. Having no entrepreneurs has led to the situation RIO is faced with - no production growth.
Copper supply takes 10 years to come to market. Grades are falling and depths increasing.
The production cost curve has moved a long way north. Capital costs alone up by 40% - this must be amortised across the life of production.
The Nickel market is now becoming reliant upon laterites and grades less than 0.5% for future production - the cost curve rises.
I could go on. But analysts have been predicting the supply response for the last couple of years and it has not eventuated.
Insufficient new supply is being sured-up to meet demand increases let alone a great oversupply. A massive amount of production growth has been from expansions of current facilities and not greenfields.
Prices
A massive fall in all commodity prices is already being assumed to get current numbers.
To hit current analyst forecasts the copper price needs to fall 18% from $3.40 to $2.80 in 07 and 35% to hit $2.20 in 08. Assuming $3.00 in January (a 15%fall), Cu will need to get to $2.60 by the end of 07 (another 15% fall) to average $2.80.
Bankers still use $1.10 for long term. 07 is only three months away.
What type of global 'depression' are we expecting here?
Forget BHP being overvalued, with the decline in global demand implicit in these forecasts, you would be crazy to invest in anything.
The consolidated nature of the industry is going to add to the supply/demand function
Why should historical low prices even be mentioned?
Do we expect the price of a beer to go back to 20 cents a pot?
Nobody wants to stick their neck out and that is why BHP is and has been for the last four years cum EPS-upgrade
Cashflow and Acquisitions
On current forecasts, BHP will generate over $30 billion in free cash before the end of the decade.
Current case NPVs using bearish commodity prices place the NPV around $20.
If you assume the $30bn is geared to $50bn and invested in projects or takeovers with NPVs exceeding the 9% WACC - it is not hard to get an NPV over $26.
If you put more bullish forecasts for commodities in the model -$35 is not a ridiculous forecast.
Finally, in relation to acquisitions, I think you have I wrong when you say that as a rule they destroy value.
The cash takeover of WMR has created exceptional value. The MIM takeover by Xstrata would have been incredible. As long as the NPVs on the acquisitions are positive, they should add value now and into the future.
Low cost, large scale and ready to produce projects are not common and BHP has a warchest of $50b to buy future growth. With the exception of RIO, the other global majors have seen the value in acquisitions.
Why explore when you could buy Oxiana for 8 times, Alumina for a 25% discount and other one mine companies on sub 4 PEs?
Most speculative booms are close to an end when the takeovers are made with overvalued script.
Not by companies trading at 10 times earnings buying with cash.
Consensus EPS is now $2.20 07, $2.06 08 and 1.80 in 09.
In my view, these numbers will prove excessively conservative and like in the last three years, will be progressively upgraded as prices remain far stronger than forecasts.
The base scenario in analysing BHP must be consensus or individual analyst forecasts. We can only really identify our personal differences with the assumptions used by the analysts and identify the effect this has on our valuations.
Addressing accounting policy and balance sheet first (which I believe has very little to do with the divergence in our valuations).
The positive effect or leverage from provisional pricing has been valued by some analysts at around $1bn (astonishing) in the previous year.
This was a large proportion of the surprises from BHP and RIO - but is not seen as sustainable (on the assumption of falling base metals in the future) and is not used in forward EPS assumptions.
Good analysts are accounting for this in their p/l numbers and individual research pieces abound on the subject. Those who were wrong this last earnings season now have a grip on this effect.
The major sensitivity in the differences between our valuations must be commodity prices and by way of direct association - world growth.
Demand
While all the fear surrounds the US consumer slowing down (as it has for the last decade), US industrial production and government spending remains strong.
People get worried about a slowdown in the rate of US growth, forgetting that under current demand conditions, there are deficits in many metals and inventories are tight. Just a steady state would see the 40% price reductions expected in commodities look silly.
I understand that China exports a lot to the US. But even if the US has a recession, the effect is not going to send China into a tailspin. The 10% GDP growth rates of the Chinese economy have not been exclusively fuelled by the US and will not be turned negative by a US slowdown.
The US is not homogenous and the banrupcty of property spivs in Florida is not going to turn the entire country into recession. The recession fear in the US maybe warranted - but it is hardly a structural long term problem.
Sydney is in a recession due to a property bubble - but the rest of Australia is not.
Industrial production is forecast to rise by 15%pa over the next three years in China, 8%pa in Asia ex-China and 8%pa in Eastern Bloc.
Metals markets in Europe are ridiculously tight at the moment - people forget Europe all the time, being fascinated by CNBC and the US markets.
The last three years metals price boom was predicated on Chinese industrial production growth of over 16% pa in 03,04 and 05.
The US IP grew at 0.6%, 4.1% and 3.0% in the same years. US IP is still forecast to grow at 2.6% in 07 and 3% in the out years.
Industrial production in copper intensive - textiles industry is not. The industialisation of the Chinese and Eastern European countries is increasing the amount of base metals they consume. The growth of intensity of demand for base metals in developed countries is benign.
The Chinese internal/external GDP split will change and which way would you expect it to go?
As the country draws more wealth from dealing overseas, the standard of living expands and the industrial intensity of their lifestyles expands exponentially.
The infrastructure being built (electiricity generation being an excellent example) in China is astonishing.
They are building massive amounts of property and infrastructure to meet demand for the tens of millions moving to cities. This process is not going to be undertaken over a period of three years - it is going to take far more than a decade.
China will have hiccups (bad debts etc) - but you are not going to slow it down for decades.
A trillion USD in the coffers can fix a lot of problems!
If (when) the Chinese stop buying USD and if (when) the yuan appreciates, the developed nations will stop importing deflation from China and will have inflation.
What do you want to own when inflation comes - commodities.
The US will not put tarriffs on Chinese goods. Despite the bluster from fools in the developed countries like the US and Australia, anyone with half a brain can see that our standards of living are not going to increase from having more factory jobs and more expensive consumables.
The Chinese are not good at allocating capital - but nor are we. Their innefficient use of capital leads to volume at all cost production with razor margins and ours leads to bottlenecks and the inability to funds infrastructure required to exploit opportunities. A match made in heaven!
Supply
A decade of underinvestment is leading to a benign supply response.
BHP and RIO are doing buy backs instead of exploration. The big boys are buying supply and not exploring. This is completely different from previous cycles.
The management consultants focus on EPS growth during their contracted employment and recommend buy backs and capital returns. Having no entrepreneurs has led to the situation RIO is faced with - no production growth.
Copper supply takes 10 years to come to market. Grades are falling and depths increasing.
The production cost curve has moved a long way north. Capital costs alone up by 40% - this must be amortised across the life of production.
The Nickel market is now becoming reliant upon laterites and grades less than 0.5% for future production - the cost curve rises.
I could go on. But analysts have been predicting the supply response for the last couple of years and it has not eventuated.
Insufficient new supply is being sured-up to meet demand increases let alone a great oversupply. A massive amount of production growth has been from expansions of current facilities and not greenfields.
Prices
A massive fall in all commodity prices is already being assumed to get current numbers.
To hit current analyst forecasts the copper price needs to fall 18% from $3.40 to $2.80 in 07 and 35% to hit $2.20 in 08. Assuming $3.00 in January (a 15%fall), Cu will need to get to $2.60 by the end of 07 (another 15% fall) to average $2.80.
Bankers still use $1.10 for long term. 07 is only three months away.
What type of global 'depression' are we expecting here?
Forget BHP being overvalued, with the decline in global demand implicit in these forecasts, you would be crazy to invest in anything.
The consolidated nature of the industry is going to add to the supply/demand function
Why should historical low prices even be mentioned?
Do we expect the price of a beer to go back to 20 cents a pot?
Nobody wants to stick their neck out and that is why BHP is and has been for the last four years cum EPS-upgrade
Cashflow and Acquisitions
On current forecasts, BHP will generate over $30 billion in free cash before the end of the decade.
Current case NPVs using bearish commodity prices place the NPV around $20.
If you assume the $30bn is geared to $50bn and invested in projects or takeovers with NPVs exceeding the 9% WACC - it is not hard to get an NPV over $26.
If you put more bullish forecasts for commodities in the model -$35 is not a ridiculous forecast.
Finally, in relation to acquisitions, I think you have I wrong when you say that as a rule they destroy value.
The cash takeover of WMR has created exceptional value. The MIM takeover by Xstrata would have been incredible. As long as the NPVs on the acquisitions are positive, they should add value now and into the future.
Low cost, large scale and ready to produce projects are not common and BHP has a warchest of $50b to buy future growth. With the exception of RIO, the other global majors have seen the value in acquisitions.
Why explore when you could buy Oxiana for 8 times, Alumina for a 25% discount and other one mine companies on sub 4 PEs?
Most speculative booms are close to an end when the takeovers are made with overvalued script.
Not by companies trading at 10 times earnings buying with cash.
Consensus EPS is now $2.20 07, $2.06 08 and 1.80 in 09.
In my view, these numbers will prove excessively conservative and like in the last three years, will be progressively upgraded as prices remain far stronger than forecasts.
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d/p
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I think commodities will remain strong untill construction and China's face lift is completed for the olympics. After that who knows.
Also I read that a post valued BHP at something like $15 a share. The company did just make a 13 or so billion dollar profit. I think fear has undervalued the commodities market right now.
Also I read that a post valued BHP at something like $15 a share. The company did just make a 13 or so billion dollar profit. I think fear has undervalued the commodities market right now.
Realist
Billie Jean is not my lover
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mime said:
Yep $15,000,000,000 profit And this year is looking just as good, if not better, despite all the talk otherwise.
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mime said:
The effect of the Olympics on Chinese demand for construction products is negligible.
It is not a mere facelift - it is a shift of hundreds of millions of people to a modern, industrialised lifestyle.
http://www.thebeijingguide.com/olympic_construction/beijing_olympic_construction.html
Take a look at this Olympic construction site and check out the buildings on the horizon for a little perspective of the relative importance of the Olympics. This is the outskirts of Beijing.
Building new modern housing and infrastructure for over 20 million new city dwellers a year is a project in itself
The master planning and scale of construction is difficult to fathom:
According to the U.S. Embassy to China, the country will be building 108 new airports between 2004 and 2009
http://images.businessweek.com/ss/05/12/china_wonders/index_01.htm
______________________________________________________________
$15bn is top of consensus - Credit Suisse.
Consensus is $13bn and remains cum-upgrade
The market crapped itself in May at the wiff of inflation after getting expensive.
It is crapping out now on US fears.
If oil stays low and inflation ebbs in the US - we are going to rally very hard if Bernanke can CUT US rates and the Asian and European areas continue on their growth path.
In the meantime, hopefully the UK buy-back can shake-out some of the hedge funds using BHP shorts to finance investment in more leveraged pure plays .
Finally, when will the Aussie value managers admit defeat and accept that BHP is more of a value play than the rubbish no-growth industrials like AMC, PPX, TLS and any other stock Anton "Long and Wrong" Taglieferro likes and start to hold BHP anything near market weight??
BSD said:
Agree, agree, agree, agree, on the ball BSD!
Im calling for the FED to pause on september 20th meeting, and then a rate cut maybe in november or december, just in time to add fuel to the santa claus rally.
Housing has already suffered too much and the economy as a whole is reeling from the 17-consecutive rises. Upcoming data will confirm inflation being contained as the economy slows..
http://www.marketwatch.com/news/story/58rjpLK1JbmPr2nrGwW7T6s?siteid=mktw&dist=TNMostRead
BHP is so so undervalued, its doing so many expansions that earnings will rise even if commodity prices fall, due to increases in production. Not to mention the Olympic Dam uranium potential. It could very well be that resource upgrade that sparks it to get going again.
Broadly right although you seem to be confusing hurdle rate with WACC at the end
No
FIFO and Accounting Depreciation are accounting metrics that are irrelevant to cashflow, and hence NPV
The cash cost of producing a stockpile is taken into account in the NPV model when that cost is actually occurred. As is the revenue realised when the stockpile is sold.
The accounting concept of valuing that stockpile at the lower of cost or net realisable value for balance sheet and P&L purposes has no cash impact.