Nika“We will begin with our recommendation for the stock, and provide an overview of BHP-Billiton. Next we will discuss BHP’s strategy in comparison to its nearest rival: Rio Tinto.We will discuss the strategic and financial risks and provide a ratio and four slices financial analysis. We will conclude with our calculation of BHP’s valuation using
Nika“Figures shown above and throughout the presentation are in US Dollars”“stock traded on: NYSE, LSE London Stock Exchange, ASX Australian Stock Exchange, JSE Johannesburg Stock Exchange.”
NikaThe two entities exist as separate companies, but operate as a combined company known as BHP Billiton.The group has a global presence with more than 100 mining sites in 25 countries.
CEO took over in 2007Yin
DiversificationIndustrialization and UrbanizationCommodity Price Dependent
Check Al prices or other reasons for poor performance
Capital Management: share buybacks?Nov 15th 2010, reactivate $4.2 of 13 B buyback programme
EricLow debt levels. Why? Because they are effectively funding from CFO. Equity.Board said no to the 2008 Rio Tinto deal,2010 Potash Corp Bid failureAnti Trust issues?Government networking requires involvement
Iron in Pilbara, Australia- Transported by rail to Cape LambertBrownfield meaning?Better map with all resourcesMadagascar Mining: Heavy mineral sands: ilmenite and zircon, TIO2 (pigment)
Tom Albanese volunteered to forgo his bonus due to the 8.9B Aluminum asset write down which led to 2011’s low net profit figure.2 Directors not standing for re-election1 Yves Fortier2 Sir Rod Eddington
Coking Coal is the largest market share growth area.Iron and Copper are Rio’s top profit producers.
Commodity Index is highly correlated with the Mining Index.Largest Market Share Growth for Rio Tinto is in Coking Coal, used for steel production. This is primarily driven by demand for steel in developing countries such as China.
Like BHP, Iron is the largest proportion of profits.
Profit grows when revenue increases – better picture than Rio
Revenue and Pre-tax Profit
Translational exposure of non-functional currency monetary items and transactional exposure of non-functional currency expenditure and revenues
Where is the cash going?
Discuss low return on CUVI numbers – focus on acquiring mines, not necessarily investing in intangibles; revenue driven from iron ore and petroleum…. 2009 was actually iron ore and metallurgical coal.FA/WC funded by equity relatively untraditional in this market. Typically metal and mining companies borrow to fund WC/corp growth. Steady cash flows have mainly been used to finance growth with some cash going back to the shareholders.GOV Increasing due to BHP’s strong financial health. Loans Modest debt numbers leave room for further development projects, alliances or acquisitionsNVP increase due to increased provisions related to the closure and rehabilitation of mines. Other smaller balances within the provisions section are related to employee benefits, restructuring (business termination)
CUVI is growing faster than GOV – Market grew due to favorable commodity prices and increased demand from China. Due to BHP’s ability to get into favorable partnerships and alliances, the expectations for Chinese demand of natural resources to continue growing and that BHP has invested a majority of its cash to finance growth (billions have been invested in expansion projects and the development pipeline looks strong), we expect the market price to continue increasing and one should buy now to take advantage of future growth.
Strong development project prospects leading to large capital investment plan in 2012.
Recommendation• Buy!• 2011 Group Market Cap: US $234B• Group Segment DCF Valuation: US $236B• CUVI: US $2.9B• GOV: US $174B
Overview• BHP Billiton comprises two entities: • BHP Billiton Limited • BHP Billiton Plc.• 100 mining sites in 25 countries.• Headquartered in Melbourne, Australia• Employs over 100,000 people including contractors.• 10 Operating Segments: • Iron ore, Petroleum, Uranium, Aluminum • metallurgical and energy coal • base metals, nickel, manganese • diamonds and specialty products
Key Dates• 2001 Australian Broken Hill Proprietary (BHP) merges with the UK’s Billiton. Billiton CEO becomes Group CEO, but resigns 6 months later• 2003 The company begins a $5 billion investment in oil extraction• 2005 R&D Alliance with Chinese Academy of Science (CAS)• 2008 BHP Billiton attempts to buy Rio Tinto. Board Rejects• 2009 BHP and Rio Tinto form 50:50 Joint Venture in Australia (Iron Ore)• 2011 Acquisition of Chesapeake Energy Corporation’s USA shale gas assets
Mining and Extraction Industry Observations• Sensitive to Commodity prices• Sensitive to taxation such as Australian MRRT: Minerals Resource Rent Tax (From July 2012) and Carbon pricing• Capital Expenditure High Consolidation• Technology Increasing Extraction Potential• Equipment Procurement lead time increasing• Large Scale Transportation Required
People• Group CEO Marius Kloppers• Employees: 100,000 Including Contractors• 2010: Net Profit per employee: $130,000
Elements of BHP’s Strategy• Unprecedented Demand growth due to Industrialization and Urbanization of Developing World• Geographic and Industry Diversification• Largest source of Profits from Iron Ore and Petroleum
Elements of BHP’s Strategy• Heavily investment in Iron Ore and LNG production.• Gained technical expertise in oil drilling from recent Acquisition of Petrohawk ($12.1 B Cash)• Similar Drilling Procedure for gas and oil. Drill for gas near oil deposits – Win-Win
Rio Tinto’s People• Chairman Jan du Plessis• Group CEO Tom Albanese: No Bonus this year• Group CFO Guy Elliot• Copper CEO Andrew Harding• Energy CEO Doug Ritchie• Employees: Fewer than BHP Billiton (77,000)• 2010 Net Profit per Employee: $185,000
Elements of Rio Tinto’s Strategy• Geographic and Industry Diversification• Largest Market Share Growth: Coking Coal• Copper is second profit source after Iron Ore• Striving for lowest cost base for Aluminum• 2011 Net Profit reduced by Aluminum Asset Impairment (US $9 Billion)
Rio Tinto’s Market Share Source: Rio Tinto Investor Presentation, Sep. 2011
Source: Rio Tinto Investor Presentation, Sep. 2011
Commodity Price Risk• High for input costs• Relatively low for outputs• Geographical Diversification mitigates this
Exchange Risk• 2011 Year on Year Change: $0.22, 3% of profit• Transactional exposure of non-functional currency expenditure and revenues - Not disclosed (unknowns!) Source: BHP 2011 AR
Liquidity risk• US$14.2 billion due next year• Cash and cash equivalents US$10 billion, unused facility US$4.06 billion. BHP has enough money to pay without taking into account other assets (receivables etc.).
• Credit Risk Managed by maintaining procedures converting the application for credit approvals, granting and renewal of counterparty limits and daily monitoring of exposures against these limits.• No significant concentration.• Balance of allowance account for impairment - 2% of gross amount• Past-due but not impaired receivables - 6% of gross amount- most less than 30 days• But other information such as counterparties ratings and geographical analysis not disclosed (unknowns!).
Discounted Cash Flow Valuation Based on segments• Free cash flow= EBIT * (1-tax rate) + D&A – changes in working capital – capital expenditure• We have disclosure of segment D&A and capital expenditure but not changes in working capital• Assumptions: Group changes in working capital weighted by segment assets• Discount rate (WACC): 11%• Conservative assumptions: 0% growth rate for the next five years and 2% for terminal value)• Valuation: US $236 Billion