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BHP Billiton vs. Rio Tinto

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Presentation for Financial Analysis 2012 at UEBS. Presentation Edited by EB Holmes.
Contributors: EB Holmes, R. Dahler, N. Naskidashvili, J. Guo.

Published in: Business, Economy & Finance
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BHP Billiton vs. Rio Tinto

  1. 1. BHP BillitonFinancial Analysis as of March 14th 2012
  2. 2. Agenda1) Recommendation2) Overview3) Strategy4) Risks5) Financial Analysis – Ratios6) Financial Analysis – Four Slices7) Valuation
  3. 3. Recommendation• Buy!• 2011 Group Market Cap: US $234B• Group Segment DCF Valuation: US $236B• CUVI: US $2.9B• GOV: US $174B
  4. 4. 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
  5. 5. BHP Billiton Overview
  6. 6. 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
  7. 7. 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
  8. 8. Strategy
  9. 9. People• Group CEO Marius Kloppers• Employees: 100,000 Including Contractors• 2010: Net Profit per employee: $130,000
  10. 10. 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
  11. 11. 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
  12. 12. Geographic & Industry Diversification Source: BHP Investor Presentation, Feb. 2012
  13. 13. EBIT, EBIT Margin Source: BHP Investor Presentation, Feb. 2012
  14. 14. Sources and Uses of Cash Source: BHP Investor Presentation, Feb. 2012
  15. 15. Risk Analysis: SWOT• Strengths – Balance Sheet and Cash Position – Centralized Marketing Engine• Weaknesses – High Copper Extraction Costs – Low Margin on Aluminum• Opportunities – Demand growth due to Urbanization and industrialization, especially in China• Threats – Financial Instability in Euro Zone, Price Volatility – Lack of Board-CEO collaboration – Anti-trust legislation, Carbon Taxation – Reputational Risk (Dirty Business) – Inclement Weather linked to Climate Change
  16. 16. Competitor Analysis: Rio Tinto
  17. 17. Source: Rio Tinto Investor Presentation, Sep. 2011
  18. 18. Copper Extraction Cost Advantage Source: Rio Tinto Investor Presentation, Sep. 2011
  19. 19. 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
  20. 20. 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)
  21. 21. Rio Tinto’s Market Share Source: Rio Tinto Investor Presentation, Sep. 2011
  22. 22. Source: Rio Tinto Investor Presentation, Sep. 2011
  23. 23. Financial Analysis
  24. 24. Rio TintoUnits: Millions USD$70,000$60,000$50,000$40,000$30,000 Revenue Pre-tax profit$20,000$10,000 $0 2007 2008 2009 2010 2011
  25. 25. BHP BillitonUnits: Millions USD$80,000$70,000$60,000$50,000$40,000 Revenue$30,000 Pre-tax profit$20,000$10,000 $0 2007 2008 2009 2010 2011
  26. 26. Segment Performance
  27. 27. Commodity Price Risk• High for input costs• Relatively low for outputs• Geographical Diversification mitigates this
  28. 28. 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
  29. 29. 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.).
  30. 30. • 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!).
  31. 31. Business Segment Analysis
  32. 32. 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
  33. 33. PP&E Investment
  34. 34. Four Slices Summary
  35. 35. Four Slices Valuation – Buy! 100.00% 90.00% 80.00% 70.00% 60.00% 50.00% CUVI 40.00% GOV 30.00% 20.00% 10.00% 0.00% 2010 2011
  36. 36. Thank You
  37. 37. Appendix Section Selected Strategic Data
  38. 38. BHP Market Capitalization Source: BHP Investor Presentation, Feb. 2012
  39. 39. Source: BHP Investor Presentation, Feb. 2012
  40. 40. Source: Rio Tinto Investor Presentation, Sep. 2011
  41. 41. Source: Rio Tinto Investor Presentation, Sep. 2011
  42. 42. Btoe= Billion Ton of Oil Equivalent, Mtoe=Million Ton of Oil Equivalent Source: Rio Tinto Investor Presentation, Sep. 2011
  43. 43. Rio Tinto’s Global Operations
  44. 44. Source: Rio Tinto Investor Presentation, Sep. 2011
  45. 45. Source: Rio Tinto Investor Website (2012)
  46. 46. Source: Rio Tinto Investor Presentation, Sep. 2011
  47. 47. Appendix Section Selected Financial Data
  48. 48. Non-current Assets by Location
  49. 49. 2011 Summary Calculation
  50. 50. 2010 Summary Calculation
  51. 51. 2009 Summary Calculation
  52. 52. CUVI Calculation
  53. 53. GOV Calculation
  54. 54. References1. ^ "BHP chief in shock resignation". CNN. 5 January 2003. http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP.biz/ind ex.html. Retrieved 13 July 2007.2. www.exchangerates.org.uk Financial Risk Section3. http://www.miningmagazine.com/panorama/rio-and-bhp-join-iron-ore- forces 2009 Western Australia Iron Ore 50:50 Joint Venture

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