This document provides an analysis of BHP Billiton, including: 1. An analysis of BHP Billiton's strategy, profit drivers, and risks. 2. An examination of the mining industry using Porter's Five Forces, including rivalry among competitors. 3. An in-depth accounting analysis identifying key policies, flexibility, disclosure quality, and red flags. 4. Financial analyses including ratios, cash flow statements, and forecasts. The document conducts a thorough study of BHP Billiton to understand its business strategy and performance.

1. BHP Billiton
Case Study on Business Analysis & Valuation
Authors:
EzatMaiz Mohammad
Keshav Mehra
Shaheen Tariq
2015

2. Contents
Executive Summary:..................................................................................................................................... 4
1. Strategy Analysis .................................................................................................................................. 5
1.1 Profit Drivers ................................................................................................................................ 5
1.2 Risks.............................................................................................................................................. 5
2. Industry Analysis .................................................................................................................................. 6
2.1 Rivalry among existing organizations:..........................................................................................6
2.2 Threat of Substitute Products:....................................................................................................... 7
2.3 Threat of New Entrants:................................................................................................................ 7
2.4 Bargaining powers of the suppliers: .............................................................................................8
2.5 Bargaining powers of Customers:.................................................................................................8
3. COMPETITIVE ANALYSIS ............................................................................................................... 9
3.1 Potential Competitors.................................................................................................................... 9
3.2 Competitive Strategy...................................................................................................................10
4. Accounting Analysis:.......................................................................................................................... 11
4.1 Identify key accounting policies: ................................................................................................11
4.1.1 Inventory valuation:............................................................................................................11
4.1.2 Depreciation policy: ............................................................................................................12
4.1.3 Bad debt provision..............................................................................................................13
4.1.4 Research and Development................................................................................................13
4.1.5 Goodwill Amortization........................................................................................................13
4.2 Accounting flexibility .................................................................................................................14
4.3 Evaluate quality of disclosure and accounting strategy .............................................................14
4.4 Identify red flags and their effect on accounting numbers: .......................................................15
4.5 Undo accounting distortions.......................................................................................................16
5. Equity Analysis .................................................................................................................................... 17
6. Financial Analysis............................................................................................................................... 18
6.1 Ratio Analysis .............................................................................................................................. 18
6.1.1 Operating management......................................................................................................18
6.1.2 Investment management....................................................................................................18
6.1.3 Financing decisions.............................................................................................................18
6.1.4 Dividend policy.................................................................................................................... 19
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3. 6.1.5 Profitability ratios ...............................................................................................................19
6.1.6 Operating turnover ratios ....................................................................................................20
6.1.7 Liquidity ratios.................................................................................................................... 20
6.1.8 Solvency ratios.................................................................................................................... 20
6.1.9 Sustainable Growth rates ....................................................................................................21
6.2 Cash Flow Statement Analysis ...................................................................................................21
7. Prospective Analysis............................................................................................................................ 22
7.1 Forecasts ..................................................................................................................................... 22
1.1.1 Sales forecast ...................................................................................................................... 22
1.1.2 Cost forecast........................................................................................................................ 22
1.1.3 Profitability forecast............................................................................................................22
1.1.4 Dividend forecast................................................................................................................22
7.2 Evaluation ................................................................................................................................... 23
CONCLUSION:.............................................................................................................................................. 23
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4. Executive Summary:
The below report does an in-depth analysis keeping in mind porters five forces to understand
strategy followed by in detail accounting analysis which highlights the red flags. In depth
financial analysis understanding various ratios of the company covering various factors helping
investor understand the business better and see the way forward for Bhp Billiton.
Introduction:
Bhpbilliton is a 150-year-old mining company started from Indonesia. They have been market
leader in the resource mining industry, which have used unique and effective ways to lead in the
particular industry and the below report shows how.
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5. 1. Strategy Analysis
1.1 Profit Drivers
• Efficiency – In terms of cost management.
• Growth – Paying higher dividends or increase in share value keeping shareholders happy
boosting equity funded capital.
• Income – Not only revenues but also reducing loss in forex and fluctuating prices in
resources
• Sustainability – Resource rich sites and positive cash flows from operating activates to
keep business going.
• Diversification – In terms of types of resources mined.
1.2 Risks
 Fluctuating resource prices.
 Foreign Exchange rate.
 Demand and Supply.
 Highly depended on cross border trade hence foreign economic conditions.
 Natural resources depended – Laws and Depletion
 Mother Nature – Unpredictable
 Politics and Country relations
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6. 2. Industry Analysis
2.1 Rivalry among existing organizations:
Direct Competitor Comparison
BHP
Alcoa
Inc
Rio Tinto
Ltd
VALE
.S.A
Industrial Metals &
Minerals
Market Cap: 159.47B 16.44B 103.37B 31.02B 8.60M
Employees: 123,800 59,000 N/A N/A 36.00
Qtrly Rev Growth
(yoy):
-0.12 0.07 -12.50% -0.23 0.34
Revenue (ttm): 63.18B 24.27B 51.17B1
28.80B 5.12M
Gross Margin
(ttm):
0.79 0.22 N/A 0.33 0.46
EBITDA (ttm): 27.64B 3.86B N/A 10.28B -634.19k
Operating Margin
(ttm):
0.29 0.11 N/A 0.21 -0.40
Net Income (ttm): 9.99B 603.00M 3.66B 311.22M N/A
EPS (ttm): 1.87 0.21 N/A 0.06 N/A
P/E (ttm): 16.01 64.05 N/A 102.03 22.44
PEG (5 yr
expected):
3.36 1.11 N/A N/A 0.09
P/S (ttm): 1.94 0.67 N/A 1.11 15.34
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7. (#Note: The above data is for understanding the difference between competitors
approximately 2012-2013)
The above table is the numeric comparison of Bhpbilliton and its closest global competitors.
The above information clearly shows Bhpbilliton being the largest organisation followed by
Rio Tinto, Vale S.A, Alcoa Inc and Industrial Metals & Minerals respectively. The
comparison is purely based on the current Market Cap and Net Income and EPS share of
each of the companies, and how revenues of Bhpbilliton and Rio Tinto Ltd are very close
but there net income vary greatly showing that Bhpbilliton has better ways to reduces
expenses and taxes and have a higher income in comparison to its main rival.
2.2 Threat of Substitute Products:
Bhpbilliton is a resource mining company from things like iron ore and coal and petroleum,
uranium, etc. Which are core materials used for infrastructure and energy, which are very
crucial in today’s growing world as with the growing world there in an increase in the
demand for consumption of energy and infrastructure needs. Though there might be growing
alternatives to fossil fuels in terms of energy production which are being replaced by water,
solar, wind and popular biofuels and are being supported by environmental laws and
environmentalists they are not viable in economic terms for the developing countries as they
are too expensive to be adopted in the near future. Bhpbilliton biggest customers in terms of
consumption for energy generation are developing countries and china the highest populated
country in the world is Bhpbilliton biggest consumer. Hence making their products very
expensive and difficult to substitute in the main countries to where they supply due to current
infrastructure and energy demands in those countries.
2.3 Threat of New Entrants:
The mining industry irrespective of the footprint (size of the industry) is very hard to get into
as it’s very expensive for new entrants. The process to start mining in long process in terms
of finding and locating and start mining and the capital investment and the power to hold
must be great and strong network to distribute and deliver products is crucial making it very
unattractive and expensive proposition for new comers. Hence making that threat from new
entrants low, and almost negligible.
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8. 2.4 Bargaining powers of the suppliers:
The bargaining power of suppliers is that factor which determines the intensity of
competition in the concerned industry. In terms of Bhpbilliton a resource mining company
the bargaining power of suppliers, to be judged is a very difficult task as the supplier is
nature and Mother Nature at time can be very unpredictable. Hence bargaining powers
depends on natural sources is neither high nor low though can be argued by the availability in
terms of the amount of resources available to mine depending on the kind of recourses
companies mining and under that condition Bhpbilliton mines are rich in resources or we can
say “supply”.
2.5 Bargaining powers of Customers:
Bargaining power of costumers in terms of availing the recourses is low but they can
influence the price depending on the global demand of a certain recourses hence making it a
complex situation and giving more power to the buyers. Recent example could be petroleum
prices going drastically low.
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9. 3. COMPETITIVE ANALYSIS
3.1 Potential Competitors
In the mining industry potential competitors would usually be established mining companies.
Barriers for new entrants as we discussed before are very high due to high entry and exist costs.
As mentioned above the only real competition for Bhpbilliton in the near future would be Rio
Tinto provided it grows constantly and it’s not greatly affected by the resource price fluctuations.
Valuation Measures
RIO
Tinto Bhpbilliton
Percentage
Comparison (Rio
vsBhp)
Market Cap (Billion) 101.93 159.35 63.96611233
Enterprise Value (18/04/2015)
(Billion) 117.75 185.11 63.610826
Trailing P/E 15.69 16.01 98.00124922
Forward P/E (31/12/2016) 16.44 23.05 71.32321041
PEG Ratio (5 years) -2.79 -1.77
Price/Sales 2.17 2.54 85.43307087
Price/Book 2.23 2.01 110.9452736
Enterprise Value/Revenue 2.47 2.93 84.3003413
Enterprise Value/EBITDA 6.77 6.7 101.0447761
As the above table shows the latest data of “Rio Tinto vs. Bhpbilliton” we can see that they both
are quite similar in their performance when compared to their Market Cap and theof the
enterprise.
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10. 3.2 Competitive Strategy
 To own and operate large, long-life, low cost, expandable upstream assets (upstream – is a
term used for the stage of mining companies during the exploration stage) which are
diversified by types of resources, locations and markets.
 Pursue Growth:
• Correct evaluation and development done for cost efficient extraction of resources.
• Low cost distribution of products using efficient well established distribution networks.
• Managing financial risks – forex, marketing costs, etc.
• Defining and governing world-class functional standards.
Hence, leading Bhpbilliton to be a long-term sustainable business true to its roots.
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11. 4. Accounting Analysis:
The analysis in this section will determine the degree to which BHP Billiton’s financial reports
and accounting information are realistic and reliable information to the investor.The analysis will
focus on management policy and its effects on the quality of the financial statement. Also, the
analysis will determine any red flags and effective adjustment if necessary.
4.1 Identify key accounting policies:
The below sub-section will study BHP accounting policies and the degree of conformity to
accounting standards for the following Inventory Valuation, Depreciation, Bad Debt, Research
and Development, and Goodwill.
4.1.1 Inventory valuation:
Mineral reserves, Petroleum reserves, and Liquid Gas are the most significant part of the
inventory for the mining industry. Since the reserves are found in deep layers of earth, it is
default to have a confidence level of measurement of the resaves. For example, valuing a
Mineral Reserve site take into account many operational, economical, and political factors
effecting the process and costs associated with extractions. Currently and under IFRS there is no
concrete framework to measurement of the recourses. However, the Committee for Mineral
Reserves International Reporting Standards, CMRIRS, has set guidelines on the requirements to
estimate Mineral Recourses:
A- The level of confidence and interpretation for the geological area a reserve is located in.
B- Reserves are of high quality, backed by representative samples and assays.
C- Application of proper estimation technique.
This is applied by ongoing mapping and sampling the deposits, guaranteeing high quality
sampling methods (Geostatistical and Statistical Techniques), and employing competent and
qualified analysis. However, the guidelines states that even with the highest confidences in
mapping of the recourses, the results are only estimates but not measurements. Thus, any
interpretation on the geological site can change the value of the reserves; Figure 1 shows the
relationship between Mineral and Ore reserves in respect to the confidence level of the
geological site.
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12. Figure 1 (CRIRSCO, Recourses/Reserves Reporting Standards for Minerals, 2005)
Given the information above, it is expected and within the Mining Industry to have frequent
write offs or adjustments of their inventory account.
BHP’s inventory accounting policy including work in progress is valued at the lowest average
cost and net realizable value (the expected sale value of an asset less the expected cots). This is
because minerals, petroleum and other extracts sales values are affected by international trades
and fluctuating prices, and the cost to produce the raw product is associated with economic and
legal factors. Finished Goods Inventories are accounted on the basis of absorption costing (Direct
Costs plus Overhead Costs) this is composed of cost of raw material and mining overhead.
Minerals Inventory or Reserves quantities are assessed but not measured through surveys and
assays. Moreover, Petroleum Inventory is assessed by flow rate or tank volume measurement,
where calculations are driven from sample analysis too.
4.1.2 Depreciation policy:
The depreciation policy is based on the estimated residual value of the asset over the estimated
useful life on the asset. The below table 1 summarizes depreciation policy:
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13. Asset Method
Buildings 25 to 50 years.
Land Not Depreciated.
Plant & Equipment 3 to 30 years straight-line method.
Mineral rights & Petroleum interests Based on reserves in a unit of production basis.
Capitalized exploration & development
expenditure
Based on reserves on a unit of production
basis.
Table 1 Depreciation Methods (BHP Limited, Annual report, 2014)
To compare BHP depreciation methods within it industry, we have selected Mastermyne PTY
Ltd. Mastermyne uses the straight-line and the diminishing bases, a discount pool, over the
estimated useful life. Another competitor of BHP is Rio Tinto, they are using the same
depreciation methodology. However, the data wasn’t found in the annual report.
4.1.3 Bad debt provision
As stated in BHP annual report 2014, there is no provision over bad debt, that it has not been
recognized to any outstanding balances. However, “Provisions for Doubtful debts” is recorded in
the current receivables with a balance of AUD 115 millions.
4.1.4 Research and Development
When a reserve is determined at the phase or research and development, capitalized exploration
is reclassified as asset under construction under property. A development is all the expenses
occurred during the extract phase and sale of extracts. Any development expenditure is
capitalized as asset under construction, IAS 16.
4.1.5 Goodwill Amortization
Goodwill is the excess of cost over fair value of the identifiable net assets acquired. In BHP this
is seen in business combination, where BHP pays an interest in a business combination over the
fair value. Goodwill in a business combination is considered to have an indefinite life time and
thus cannot be amortized, (FASB, Business Combinations, 2001). BHP Goodwill is assessed
annually for a possible impairment (IAS 38), and this is calculated in two steps, first the carrying
amount of an asset added with goodwill is compared to the fair value of the asset. If the fair
value is greater than the carrying amount then no impairment is recorded. Second, the fair value
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14. is compared to the carrying amount; if the result is greater than Goodwill then impairment is
recorded in the income statement for the difference.
4.2 Accounting flexibility
The main profit driver of BHP is its servers of minerals and other extracts, which correspond to
the majority of Inventory. As noted in section 1.1.1 the inventory value can be altered to the
benefit of the management strategy giving them Accounting flexibility. Since the value of the
reserve is also measure by net realizable value per unit, an estimate of market value of the final
product shows flexibility in valuing their inventory. This can affect the income statement by
reducing expenses, thus showing higher EBIT and EBITDA that would influence investors.
4.3Evaluate quality of disclosure and accounting strategy
KPMG Australia have practiced an “Unmodified” opinion over the consolidated financial
statement, the financial statements are in accordance to generally accepted accounting principles,
there is no departure, and the amounts in the financial statement represent the economical
position of the company. The value of inventory in a mining industry is an estimate of the size of
the reserve and the costs associated with the extraction of the reserves.
BHP financial statement disclosed all relevant accounting policy, as the footnotes reflects the
accounting policy of BHP. The other segments of BHP performance are clear and represent the
performance of BHP as a whole.
Table 2 Directors Interest (Morningstar, BHP)
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15. Management policy in accounting and in comparison of other competitors is fairly similar except
to depreciation. This is the reason that BHP has many projects worldwide, this have resulted in
the need for BHP to integrate with other inline business to facilitate its operations; moreover, the
depreciation policy applied is acceptable internationally as BHP other subsidiaries are audited as
to the country hosting the subsidiary. Management is not influenced by the profits of BHP nor
have major shares in the company, table 2.
4.4Identify red flags and their effect on accounting numbers:
Revenue from operating activities hasn’t been increasing during the period from 2012 to 2014. While,
revenue from non-operating activities have been increasing, Table 3. This is seen especially in June 2013
where the revenue from non-operating activities had the highest value among the other years. This is an
indication that BHP is trying to cover its increase in expenses that year 2013, Table 3. BHP had to sell
major parts of it business to reduce its expenses and to increase its revenues.
Table 3 BHP Revenue/EBITDA over 10 years, (Morningstar, BHP)
BHP have been selling parts of it business since 2013 to improve EBITDA figures, this is found at BHP
annual report in the financial statement, section 3 exceptional items. Our study is limited to 2014 events
Table 4 Pinto Valley Sale, Describing BHP selling parts of its business, (BHP, Annual Report, 2014)
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16. 4.5Undo accounting distortions
To undo the accounting distortions mentioned in the previous part “Identifying red Flags”, we will reverse
the journal entry for the sale of Pinto Valley, and since an impairment of goodwill haven’t been
recognized by the sale no further adjustment for goodwill is needed:
Sale of Pinto Valley 146.4555M
Gain on Sale before Tax 506.5445M
Cash 653 M
(Journal entry to reverse the sale)
The Tax allocated for 2014 is 31.57%, as to the reverse the tax, profits after tax should be increase by
506.5445 x .3157 = 159.92M.
Thus, Profits after Tax = 15,752.65 + 159.92 = 15,912.57M
Table 5 BHP Profit after Tax, (BHP, Annual Report, 2014)
Other revenue will be decreased, 1617.83 -14.4555 = 1603.3745. Thus, total revenue will be 71343.95 +
1603.3745 = 72,947.3245. Thus EBITDA will be 33,490.8445M instead of 33,505.31.
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17. 5. Equity Analysis
To evaluate the Equity of BHP, we will implement the Dividend Discount Model.
Equity Value = DIV1/ (1+Re)^1 + DIV2/ (1+Re)^2 + DIV3/ (1+Re)^3 + …..
DIV: Expected future Dividends or investment returns.
Re: Cost of Equity capital.
First, we will calculate the cost of Equity of BHP using the CAPM model assuming a constant growth of
25.00% from last year.
Data Collected from Morningstar:
Beta: 0.91 RM: 4.3% RF: 2.96% (10 years Bond, Reserve Bank of Australia)
Ke = 0.0296 + 0.91 ( 0.043 – 0.0296)
Ke= 4.18%
As calculated in excel the equity value is at 2260.80M on a 107,163,534 shares, so the actual value of the
share should be AUD $21.09 by dividing the equity value by the number of shares. Thus we conclude that
BHP is overpriced since the current market share value is 29.97 as to the 20th
of April 2015, and we
hereby and as to the valuation in this section analysis advise our client not to invest in BHP. However, the
client is advised about the data limitation and the formulas used. We have assumed that BHP has a
constant growth rate of 25%.
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18. 6. Financial Analysis
6.1Ratio Analysis
6.1.1 Operating management
During December 2014 half year, there has been an increase in the group production by 9% and
by the end of financial year 2015; there will be growth in the group production by 16%. Also,
there has been an increase in the metallurgical coal production by 21% in half year 2014
December since Illawarra and Queensland coal achieved half year volumes.
Iron ore production rose by 15% as the utilization and availability of Jimblebar was improved
along with the integrated supply chain. 9% increase in the production of petroleum was recorded
in 2014 December as well as an increase of 71% in Onshore US liquid volumes. However, there
was a decrease in the copper production was recorded in the same time frame half year.
6.1.2 Investment management
There is an increase in the receivables turnover which means that the company is efficient in
collection from its creditors.BHP is also very particular about managing its credit and price risks
by assessing the creditworthiness of their customers. Inventory turnover shows the times
inventory is used over the period of time. BHP’s inventory turnover has declined in the last three
years showing the inventory is held and is not being used effectively however, we can also see
that it has increased in the last 5 years so we can conclude that the overall performance was
efficient.
6.1.3 Financing decisions
Since we can see that a large portion of BHP Billiton is debt financed so there are proceeds from
interest bearing liabilities, debt related instruments, ordinary shares and also the contribution
from non-controlling interests. Proceeds from issuance of ordinary shared declined by a great
difference, which could affect the company’s financial standing. However if we see the cash
flow statement and its financial activities, we can say that the proceeds from borrowings has
performed effectively in the last 3-4 years which is balancing out the reduction in issuances.
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19. 6.1.4 Dividend policy
After the announcement of the results at the end of the period, dividends are determined for the
period. In February, interim dividends are decided which are then distributed or paid to the
shareholders in March. However, in September the final dividends are distributed which are
determined in August. In relation to this policy, these determined dividends are not reported as a
liability at the end of the period. BHP Billiton, at the end of the year, decided US62.0 cents per
share with a total of US$3,301mil to be distributed as the final dividends to be paid on the 23rd
of
September 2012 and determined on the 19th
of August. Likewise, for last two years as well; Final
dividend: US 59.0cents per share on June 30th
2013- US$3,147mil and for 2012, US$3,149mil f
US57.0 cents per share were paid as final dividend on the 30th
June.
6.1.5 Profitability ratios
If we look at ROE, we can tell that the shareholder’s money has been effectively utilized or
reinvested in order to generate income. BHP Billiton’s ROE as we can see has been fluctuating
in the last 5 years showing a final increase in 2014 of 18.47% which is considerably good since
the company can actually pay off its shareholders dividends and signs of future growth of the
company. Also we can see ROA which shows the effective use of the company’s assets at their
disposal. BHP’s return on asset showed extreme variation and by 2014 it fell to 9.56 per cent
which could mean that the company is less capital intensive and would need more money to
generate profits for future. Net profit margin has increased to 20.58 percent since last year which
could also be due to a decrease in the tax rate in 2014
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20. 6.1.6 Operating turnover ratios
There is variation in the fixed and total assets turnover which can help the investors to make
prudent decisions by evaluating the effectiveness of investment in the asset was. Overall
performance of these ratios is good so this is not the point of concern at the moment for BHP.
6.1.7 Liquidity ratios
The liquidity ratio signifies if the company has enough cash or is liquid enough to pay off its
current liabilities. It is like a test for a company in terms of liquidity. Creditors usually in the
short term would like a current ratio to be lower since it reduces the overall risk in their portfolio
or they have concerns regarding consumption of assets for growth. According to the recent
financial statements of BHP Billiton Ltd the current ratio declined since 2009 to 2013 however it
gained its position back at 1.23 times in 2014. It is 72 per cent lesser than the basic material
industry and from metals and minerals industry lower than approximately 87 per cent. Also,
since quick or acid-test ratio is calculated after removing the inventories, there has been an
increase in quick ratio since a lot of inventories were held in the given years.
6.1.8 Solvency ratios
BHP Billiton’s interest coverage ratio has increased over last few years to 38 times which is
because of an increase in the finance costs over the period of time. However, this also indicates
that BHP could use a cheaper source of finance and since BHP is exposed to business risk, it
should lower the financial risk by decreasing the debt financing. There is extreme fluctuation in
the debt to equity ratio as in 2014 it is standing on 38% which is considered to be on the verge of
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21. improving or declining because BHP is looking at valuing the investment by shareholders and
safeguarding its assets respectively.
6.1.9 Sustainable Growth rates
There was an increase in the productivity level due to an increase in the plant and trucks
utilization rates along with the reduction in maintenance, contractor and labour costs. US$40mil
was recognized as redundancies. Operating revenue, EBITDA and EBIT showed a decline in as a
percentage for 5 years which is an alarming situation for BHP. However, in the last 2 years EPS
showed sustainable growth or improvement which can be attractive to the investors since it is
positive 15.18% in 2014 from -6.01%.
6.2 Cash Flow Statement Analysis
Tax and interest by 26 per cent to about us$25.4bil in FY2014 resulted in an increase in the net
operating cash flows. After alteration in the working capital balances, about US$2.6bil was
inclined in generated cash through operations and decrease by US$2.1bil due to net taxes solely
contributed to this outrageous increase. Because the income taxes paid were low, this contributed
to a decline in net taxes which were paid of US$1.2bil along with low effective tax rate and
refund of taxes of about US$852mil. There was decrease in net investing cash outflows to
US$15.8 which was down by US$2.9bil which showed a decline in the capital and exploration
expenses by US$5.6bil which were evened out by a fall by US$2.9 in asset sales proceeds.
Expenses were calculated to be US$13.1bil inclusive of spending on petroleum and mineral
projects by US$5.6 and US$7.5bil respectively. Capital expenses stood at US$2.9bil. US$1.0bil
were the expenses from exploration which included classification in net operating cash flows of
US$716mil.Non- controlling expense and interest bearing liability of US$1.4bil and US$6.3bil
contributed to the net financing cash flows. However, interest bearing proceeds involved
issuance of four tranche Global Bond of US$5bil. All the stated inflows were balanced out by
repayment of debts and repayment of dividends by US$7.2bil and US$6.4bil respectively.
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22. 7. Prospective Analysis
7.1 Forecasts
Figure 4.1 shows the projections of BHP Billiton’s income statement from year 2015 till 2019.
These forecasts are entirely on the basis of historical data including the information provided
from year 2009 to 2014. Average of the growth in sales, cost, profitability, income and EPS was
taken for the years to come.
1.1.1 Sales forecast
Sales revenue as projected, we can say that is increasing at the constant rate of 3.2% as suggested
by the past information which will rise approximately by 13% by FY19 as expected.
1.1.2 Cost forecast
Also, interest expense is expected to increase by 10% till 2019 which can be an alarming
situation for BHP as the company is mostly funded by debt and there are more chances of
bankruptcy or investors losing interest in BHP as their share of dividend shall be paid as the
finance cost.
1.1.3 Profitability forecast
Net profit after interest and tax is expected to increase by 4.4% from FY15-FY19 which may be
attractive however; the company has the potential to perform much better.
1.1.4 Dividend forecast
Final dividend in the years to come is expected to increase by 6% whereas; dividend yield is
expected to grow by 8% which could be quiet attractive for the investors as they’d be getting
confirmed dividend with decent return on their investment since the dividend per share is also
expected to increase on constant rate of 2%.
Figure 4.1:
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23. 7.2 Evaluation
The above figures look attractive because the changes in years to come are made on a constant
growth basis however, due to information provided in the past data it is not necessary that the
projections are entirely relevant or valid in terms of making an investment decision.
We can say that a lot of factors are still absent in the model, such as economical changes in
Australia may bring about changes in the mining industry in a positive or a negative which may
or may not have caused under or over valuation.
Also, unforeseen events may occur due to which problems may occur in the mining industry.
These events cannot be predicted or forecasted which may impact the company’s future
performance analysis.
Government policies may also change in the chain of events such as, the corporate tax rate can
vary widely or other impositions may affect the company’s performance.
There is also a possibility that in next five years, the company’s sales, cost, profitability and
dividends don’t grow at an average rate like in the past data there has been prominent variation,
so taking average growth rates may not be the more valid method of projecting a company’s
future performance.
CONCLUSION:
In conclusion as we can see in the above report Bhp billton have been a market leader and see’s
very little probable competition in the near future. And after in-depth analysis from a strategy to
an accounting, followed by a financial analysis it is relatively safe to say that this 150-year-old
company has sustained itself and grown for over a century and will continue to do so.
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24. References:
"BHP BILLITON (BLT)", 2007, Investors Chronicle, , pp. 1.
www.companiesandmarkets.com: BHP Billiton - Financial and Strategic Analysis Review 2009, ,
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