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Stock: BHP Billiton Limited

Stock code: BHP

Share Price: $42.34 (as at close 24/06/11)

P/E Ratio:   10.37 (Sector P/E 13.0)

Market Cap: $135,877,000,000

Broker Buy Recommendations:

Morningstar, $53.50 target (21st June 2011, share price was $42.00 that day)

Patersons Securities (20th June 2011, share price was $41.36 that day)

William Shaw Securities, (20th June 2011, share price was $41.36 that day)

Atom Funds Management (14th June 2011, share price was $43.05 that day)

RBS Morgans, (14th June 2011, share price was $43.05 that day)

Novus Capital, (14th June 2011, share price was $43.05 that day)

Investor Centre: BHP Billiton Limited

Company news: BHP Billiton Limited

Chart: Share price over the year to 24/06/2011

With continuing demand expected from China and India for many years, and a watered-down proposed mining tax expected to have little impact, many analysts are picking resources stocks with confidence, particularly megaminers BHP Billiton and Rio Tinto.

BT Investment Management portfolio manager Jim Taylor likes the outlook for iron ore and coal at the moment and he thinks that even the prospects for aluminium seem to be improving. Shane Oliver’s analysis of the latest profit reports confirms this good news. Oliver says, “Thanks to a huge surge in commodity prices which has boosted revenues even though overall mining production is subdued, resources companies have shot the lights out with 65% earnings growth over the year to 31 December. The mining boom remains alive and well and, if anything, strengthening with the terms of trade continuing to rise and set to further boost mining sector profits.”

Pengana capital Managers portfolio manager Tim Schroeders agrees that large cap diversifieds like BHP Billiton (BHP) and Rio Tinto (RIO) to weather a protracted period of market correction better than some pure-plays or explorers moving into development phase. “Investors are likely to remain cynical about junior resource stocks until there’s greater clarity over where markets are heading,” says Schroeders.

Description

Two companies dwarf the rest of the resources sector: the world’s largest miner, BHP Billiton (BHP), followed by Rio Tinto (RIO). Together they make up more than half of the S&P/ASX Resources Index by market capitalisation, and dominate mergers and acquisitions activity. In fact, the BHP board met this week in London and many speculate that with Woodside’s share price slipping over the past week that the board must have been putting a potential takeover of WPL back on the table.

Although BHP told the ASX only a few months back that it was unaware of any reason for speculation that it would bid for Woodside, WA Premier Colin Barnett admits that BHP had sounded him out on a potential bid as recently as late last year.

In 2011 BHP Billiton (BHP), the fifth largest company in the world, posted half-year profits up 72% from last year. It also holds the title of the world’s largest mining company, and is responsible for about 39% of Australia’s production. Its global operations are truly impressive, comprising about 100,000 employees and contractors located in over 25 countries.

BHP is among the world’s top producers of major commodities, including aluminium, energy coal, metallurgical coal, copper, manganese, iron ore, uranium, nickel, silver and titanium minerals, and have substantial interests in oil and gas. The tables below outline BHP’s reach:

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Source: BHP

Its primary listing is on the ASX and it also has a listing on the London and the Johannesburg Stock Exchanges. Global headquarters are located in Melbourne, Australia.

Uranium

Uranium has been a hot topic since the disaster in Japan, and as Australia’s second-biggest uranium miner – with the potential to become the biggest with the proposed expansion of the Olympic dam – BHP is exposed to this dividing commodity.

Australia currently produces around 9,000 tonnes of uranium annually exclusively through three mines – Ranger mine in the Northern Territory, and Olympic Dam and Beverly mines located in South Australia. The Ranger mine, Australia’s largest, is owned by Energy Resources of Australia (ERA) and represents around 53 per cent of Australia’s total uranium production. 

The Olympic Dam mine is owned by BHP Billiton (BHP) and represents around 39 per cent of Australia’s uranium production, while Australia’s third mine, Beverly is owned by Australian private company Heath Gate and represents approximately 8 per cent of Australia’s uranium production.

Production from unlisted Uranium One’s Honeymoon uranium mine in South Australia is expected to start in the next few months, and the proposed expansion of BHP Billiton’s Olympic Dam could boost its uranium output eight-fold, making it the no.1 producer in Australia. 

Financials & Fundamentals

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Source: BHP

BHP is in a strong financial position, with long-term debt/capitalisation averaging around 21% for the past three years. On top of this, tax-effective buybacks have been a feature of these recent boom-time years.

BHP reported NPAT of US$10.52bn for the half-year ended 31 December 2010, up 71.5% and revenue was US$34.17bn, up 39%. Diluted EPS increased significantly to 188.6 US cents from 109.8 US cents the previous year and net operating cash flow was US$12.19bn, up from US$5.47bn the year before. The interim dividend was 46 US cents, up from 42 US cents last year. The final dividend for FY2011 will be announced on 24 August 2011.

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As with all mining companies, BHP’s profits are tied to commodity prices – which have been on shaky ground over the past few months.

Financials for BHP for the past three years:

 

 2008A

2009A

 2010A

 Sales Revenue ($m)

 61,809.7 62,121.0 62,100.2

 EBITDA ($m)

 29,108 27,355 28,835

 EBIT ($m)

 25,355 22,584 23,251

 Reported NPAT ($m)

 15,965.1 13,761.4 14,629.8

 Price/Earnings

 14.3 13.3 15.1

 Dividend Yield (%)

 1.7 3.2 2.6

 Net Profit Margin (%)

 25.8 22.2 23.6

 ROE (%)

 40.1 28.0 25.7

 Net Debt/Equity (%)

 21.7 13.7 6.7

 

Link to company Earnings Report: BHP Billiton Limited Full Year Earnings Report – to June 30th, 2010

 

Analysts

As is to be expected, plenty of brokers have buys on BHP, in fact it’s hard to find a bad word about the company beyond the word ‘hold’.

Shawn Uldridge, William Shaw Securities upgraded his recommendation on BHP from a hold to a buy last week. ‘The global miner’s share price has retreated due to a downturn in equity markets, a modest rise in the Australian dollar and a mild fall in commodity prices,’ says Uldridge. ‘But with interest rates on hold given recent weak jobs numbers, we expect the Australian dollar to drift towards parity with the greenback in the medium term. This is positive for BHP, and the weaker share price offers an opportunity.’

Uldridge thinks that the world’s biggest miner still has plenty of growth left after posting a record half-year profit of $US10.52 billion for the six months to December 31, 2010, up 71.5 per cent on the previous corresponding period. Revenue was up 39 per cent to $US34.166 billion. For what the market widely considers a growth stock, BHP Billiton lifted its interim dividend 10 per cent to US46 cents a share and announced a $US10 billion buyback. A strong balance sheet enables flexibility as the company embarks on an $US80 billion investment program over the next five years. The company says major iron ore and metallurgical coal projects are at advanced stages of the approval process and this should result in a substantial increase in sanctioned project capital expenditure. Uldridge says BHP didn’t raise capital during the GFC and its $US10 billion buyback will be earnings accretive, while supporting the share price over the medium term. “Most importantly, BHP is trading on a forward EBITDA (earnings before interest, tax depreciation and amortisation) of just five times, so its share price could reach $55 sometime this year,” he says.

James Georges, Patersons Securities also has a buy on the mining giant, citing its balanced portfolio of world class, long life assets and a full suite of conventional energy products. ‘A stake should be part of any balanced portfolio,’ says Georges. ‘The company has many prime assets well located to service Asia…the recent share price retreat represents a good opportunity to buy or accumulate.’

Although Cleo Nanni, Novus Capital maintains a hold recommendation on BHP, he admits that it offers a global portfolio of quality and diversified assets and should be picked up at current levels. ‘Recent price action has us buying on dips towards $43, where the company provides great value at these levels. Don’t sell; this will always be a long-term hold.’

George Raftopulos portfolio manager with Atom Funds Management says the current environment favours diversified large caps like BHP and Rio Tinto. “Given that the long-term fundamental view remains bullish, the safest way to play resources is having an eclectic mix of large low-cost operators with good resources and strong infrastructure,” says Raftopulos.

Roger Leaning head of research with RBS Morgans is another broker that remains overweight resources, favouring diversified large caps, especially those with robust cash flow and low-cost operations exposed to infrastructure commodities like iron ore, copper and coal. As Australia’s ‘proxy diversified’, Leaning says it’s often overlooked that BHP is also the country’s largest listed oil producer.

Reuters analyst consensus is OUTPERFORM, with 9 buys, 4 outperform, 2 hold, 0 sells.

Risks

BHP faces all the environmental and operational risks associated with mining as well as the country-specific risks associated with some of its assets, however this is mitigated by the fact that it is very diversified and has a strong balance sheet.

A further risk is that the global economy appears to be cooling off and demand for commodities are following suit, as has been seen with commodity price volatility over the past few months. Further crises in, a stalling recovery in the US and particularly the prospect of a slowing China are all risks to BHP’s ongoing growth.

It must be noted that diversified miners like BHP trade at discount valuations to pure plays so investors interested in gaining exposure to a specific commodity would most probably be better off investing in pure plays – although this will of course increase the risk of the investment.

Lastly it’s worth mentioning the proposed carbon tax, although as a percentage of full year 2013 net profit at $25/tonne – lower levels of industry assistance – BHP would only see a hit of 1.1% of FY13 NPAT.

Conclusion

As the largest stock on the ASX, just about everyone has some exposure to BHP, be it via superannuation, managed funds or direct shares. That’s not to say that it’s not worth looking at as an addition to a balanced portfolio, particularly if investors want to have continued to exposure to commodities but with a lower risk level via a diversified behemoth like BHP than via smaller pure play miners and explorers. Should the mining boom falter, the explorers will be the first to feel the pinch.

The reported rumour that BHP is interested in acquiring WPL may yet come to play over the following months – the BHP board may just have included a chat about Woodside in its board meeting in London last week, given Woodside shares have taken a hit over the past few weeks.

 

>>Back to the newsletter to view other articles – June 25th 2011

 

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