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BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
BHP's Record Fiscal 2011 Earnings In Line industry-specific reasons--oil in part because of the drilling moratorium in the United States and coal the weather. Yet industrywide cost pressures, in conjunction with persistent supply-side constraints, are a key plank to by Mark Taylor Analyst Note Aug. 29, 2011 commodity price support. Net operating cash flow Stock Analyst ballooned 83% to $30.3 billion, higher than anticipated. Of Analysts covering this company do not We are increasing our fair value estimate for BHP Billiton own its stock. by 5%, to $50 per share ($100 per ADR) and maintain our course unit costs lag commodity rises, a cause for joy on the way up but amplified pain on the way down. We Pricing data through September 08, 2011. positive stance. Very strong cash flows leave the balance Rating updated as of sheet in better shape than anticipated. Our fiscal 2012 anticipate unit costs to stabilize somewhat in fiscal 2012 September 08, 2011. earnings forecast is $5.25 per share. That 33% increase in in lagged sympathy with pricing.
Currency amounts expressed with "$" earnings versus fiscal 2011 reflects substantial growth in are in U.S. dollars (USD) unless Net debt grew 76% off a very low base to $5.8 billion, otherwise denoted. Western Australia iron ore volume on expansion plans and coking coal volume recovering from fiscal 2011's bad though leverage is still paltry at 10%. This changes in the Stock Price weather. We also anticipate improved performance from second half of 2012 with the $15 billion acquisition of 96.0 Petrohawk Energy. But even then leverage will remain at 86.0 aluminum and nickel, veritable laggards in fiscal 2011. We sub-30% levels and diminish rapidly with very strong cash 76.0 then expect earnings to level off on a cooling in flows. BHP spent $11.6 billion in fiscal 2011 on capital 66.0 commodities price growth from current stratospheric expenditure projects, with the largest 30% share going to 56.0 levels and the impact of the mineral resources rent tax in Australia. We forecast earnings of $4.75 per share in iron ore, followed by oil, copper, aluminum, and coal. 46.0 fiscal 2013. Group returns on invested capital increased from 20% to 29%, in line with the prior high in fiscal 2008. BHP is 36.0 In line with expectations, BHP reported record underlying enjoying unparalleled returns on capital invested at far 07 08 09 10 11 fiscal 2011 earnings up 74% to $21.7 billion. That's 40% lower prices than present--a key differentiator to other above the previous highest mark of $15.4 billion set in resource groups that began substantially investing fiscal 2008. The group earnings before interest and tax post-boom. margin improved from 36% to a record 43% courtesy of higher commodity prices, only partially offset by adverse BHP stamped its optimistic outlook with a 22% rebasing exchange rate movements. Key in order of importance of the full-year dividend to $1.01 per share (the final of were iron ore up 96% to $144 per tonne, copper up 28% $0.55 was ahead of our $0.52 forecast), "confident in the to $3.90 per pound, oil up 18% to $90 per barrel, and long-term outlook for [its] core commodity markets." There coking coal up 63% to $238.50 per tonne. Volume effects, was no dividend increase in Australian dollar terms, including the impact of weather on East Australia coal though, with the strong currency holding the payout to exports, pale in comparison. Underlying earnings per share AUD 0.98 per share. jumped 76% to $3.94, outpacing gross profit courtesy of $10 billion in share buybacks. These reduced shares on A protracted recovery remains BHP's base case for the issue by 4%. The headline fiscal 2011 profit grew 86% to developed world, with the potential for "a coordinated $23.6 billion, including $2 billion pertaining mostly to policy response to engender confidence and ease the reversal of deferred tax liabilities, noncash. volatility that has been the dominant theme of recent years." With respect to the important growth economies of Cost pressures are evident, though outside of oil are in China and India, BHP cautioned that growth in fixed-asset line with expectations, given commodities inflation. Most investment in China remains resilient and is yet to fully segments experienced 35%-40% rises in unit costs, reflect recent monetary policy tightening. though some like oil and coal were higher for BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
China's rise from economic obscurity has sustained Close Competitors Currency(Mil) Market Cap TTM Sales Oper Income Net Income commodity price growth into the 21st century. Despite BHP Billiton Ltd USD 214,421 62,354 26,922 17,111 now accounting for the lion's share of global consumption Vale S.A. USD 144,285 57,233 30,719 25,233 of many commodity staples, its per capita use remains Rio Tinto PLC USD 114,231 61,088 22,727 16,066 well below that of industrialized nations--the difference Freeport-McMoRan Copper & Gold USD 41,963 22,278 11,289 5,594 being China's vast population. India's near-equivalent Morningstar data as of September 08, 2011. numbers portend a lagged reinvigoration of commodity This doesn't appear a major shift in BHP rhetoric; the price support. The decade milestone of growth need not company has been dovish on the near term for some spell the end of the current boom. considerable years while remaining confident in a strong long term based on ongoing urbanization in the developing Positioned in the center of this enviable tailwind, BHP is world. Evidence suggests it has considerably the world's largest publicly traded mining conglomerate, underrepresented the near-term potential in recent with the financial wherewithal to weather the years--why go out on a limb? boom-and-bust cycles of the volatile commodity markets. Geographic and product diversification give BHP more BHP anticipates robust commodities demand in both the stable cash flows and lower operating risk than most of its short and medium term, supported by intensive emerging mining peers. Most revenue comes from the relative safe economic growth--and if stimulatory policy is enacted, havens of Australia/New Zealand, North America, and then more so. With respect to steelmaking raw materials, Europe. the company does anticipate growth in demand, particularly in China, to slow in the longer term to more This narrow-moat company has several key advantages. It sustainable levels. But the fundamentals even for these produces a range of commodities from oil and gas to commodities remain compelling, given a constrained diamonds, and it is a major producer of iron ore, copper, supply-side response and rising capital costs. nickel, thermal coal, metallurgical coal, and manganese. It also offers a full suite of conventional energy products. The company can benefit from a rally in any of its product Thesis Aug. 29, 2011 lines. Finally, BHP is a major Australian commodity After 30 years of decline, the world is again experiencing producer in close proximity to the Asian markets. a sustained increase in commodity prices. The last long-cycle uptrend, born at the end of the Great A geographically diversified customer base allows BHP to Depression, was driven by the rebuilding of Europe after benefit from economic growth and development in any the wars and later on the rise of Japan to economic part of the world. When all major world economies are powerhouse status. The oil shocks of the 1970s were an growing strongly, BHP's revenue and profits can benefit effective death knell. The current rise, forged on the significantly. With demand for most of its products in an industrialization and urbanization of the world's most upswing--because of the growing Asian economies and populous country, began early in the final decade of the worldwide economic expansion--BHP reported stellar 20th century, though the seeds were probably sown results in fiscal 2005-08. Fiscal 2009 softened with the considerably earlier. global financial crisis, but the company's diversified earnings stream damped the overall volatility associated
© 2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. ® The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. ß BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
with the downturn. Fiscal 2010 delivered improved profits, billion or 24% and copper at $67.5 billion or 20%. Of and 2011 stands to be another record result. course if you bundle iron ore in with the carbon steel materials group's metallurgical coal and manganese, it The good times have fortified the balance sheet. Some still wins out at $138.7 billion or more than 40% of cash has been returned to shareholders, but the bulk of valuation overall. Regardless, the energy focus reinforces the windfall is financing growth. Since the $8 billion a clear point of differentiation with Rio's iron ore skew. acquisition of WMC in 2005, BHP has approved billions in expansion projects. The development pipeline is strong. Key long-term valuation assumptions are $70 per metric With modest net debt of $3.3 billion at the end of fiscal ton iron ore, $120 per metric ton coking coal, $2.50 per year 2010, there is plenty of room for further development pound copper, $1.30 per pound aluminum, an AUD/USD projects or acquisitions. exchange rate of 0.80, and a 10% discount rate.
It is difficult to create and protect competitive advantages while focusing on multiple commodities. With the Risk exception of iron ore, we think BHP lacks real pricing We believe BHP merits a medium fair value uncertainty power in its products. There is a risk that expanding at rating, as individual commodity price volatility is offset by near-peak market conditions will result in mineral diversification and a relatively robust balance lower-than-optimal returns on investment. However, with sheet. This does not imply a lack of risk, however. BHP its impressive portfolio of businesses in terms of size and faces all the environmental and operational risks scale, BHP has a narrow economic moat, in our opinion. associated with mining as well as the country-specific risks associated with some of its assets.
Valuation, Growth and Profitability BHP made an all-cash bid for NYSE-listed Petrohawk Bulls Say Energy . The $38.75 a share offer values Petrohawk at BHP is a beneficiary of continued global economic $15.1 billion, including $3.0 billion net debt. Having now growth and increased demand for the commodities it modeled Petrohawk into our BHP numbers, we expect the produces. acquisition to be mildly accretive to earnings per share BHP's cash flow base is diversified, and the company is and valuation. We've increased our fair value estimate to less susceptible to the vagaries of the market than $100 per share from $95. About half is driven by single-commodity producers. Petrohawk, with the bulk of the balance reflecting the roll The company has an attractive, low-cost, long-life forward in valuation model to the next quarter. The strong portfolio of expandable operations. fiscal 2011 profit result is an additional benefit. Growing producer concentration is slowly tipping pricing power away from the end user and toward Noteworthy is the impact recent U.S. shale gas purchases miners. have on BHP's asset mix. From a valuation perspective, Steady cash flows allow BHP to invest throughout the Petrohawk propels the oil and gas division to the top of cycle. the list at $110 billion, or 32% of our group value overall. That's up from around 27% and ahead of iron ore at $80.5
© 2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. ® The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. ß BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
Bears Say Management: CEO Marius Kloppers took the reins from Sovereign risk heightened following the Australian Chip Goodyear in October 2007. He was expected to be government's intended Resource Super Profits Tax. The more aggressive on the acquisition and development front softer replacement Mineral Resource Rent Tax has while adhering to the Tier 1 asset-only policy. reduced, but not erased, this risk. Confirmation came with the unsuccessful 2008 Rio Tinto The global economy is cooling off; demand for and 2010 PotashCorp bids. Some shareholder unease has commodities will follow suit. arisen over these costly forays. The depth and strength of Diversified miners' stocks always trade at discount the board should ensure a deal isn't done for a deal's valuations to pure plays. Investors interested in gaining sake. Likely targets exist in the oil and gas industry, where exposure to a specific commodity would be better off antitrust issues are unlikely to feature. investing in pure plays. BHP is subject to the long-term supply/demand balance for metals, a major factor in determining the company's profitability. Chinese mineral investment, for production rather than profit's sake, could erode some of the limited pricing power mining companies have recently won.
Financial Overview Financial Health: The company is on strong financial footing. Returns on invested capital have averaged 25% during the past five years and remained above 20% even during the global financial crisis. The worth of BHP's diversified earnings stream was tested and proved. The company has reinvested throughout the cycle. The five-year average EBITDA margin is a very healthy 45%.
Company Overview Profile: BHP Billiton is a diversified miner that supplies aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium, and silver. A 2001 dual-listed merger of BHP Limited (now BHP Billiton Ltd.) and Billiton PLC (now BHP Billiton PLC) created the present-day BHP Billiton. The two operate as separate firms but are overseen by the same board and management team. Shareholders in each company have equivalent economic and voting rights in BHP as a whole.
© 2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. ® The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. ß BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
Analyst Notes
Aug. 29, 2011 BHP's Record Fiscal 2011 Earnings In Line We are increasing our fair value estimate for BHP Billiton some like oil and coal were higher for industry-specific by 5%, to $50 per share ($100 per ADR) and maintain our reasons--oil in part because of the drilling moratorium in positive stance. Very strong cash flows leave the balance the United States and coal the weather. Yet industrywide sheet in better shape than anticipated. Our fiscal 2012 cost pressures, in conjunction with persistent supply-side earnings forecast is $5.25 per share. That 33% increase in constraints, are a key plank to commodity price support. earnings versus fiscal 2011 reflects substantial growth in Net operating cash flow ballooned 83% to $30.3 billion, Western Australia iron ore volume on expansion plans and higher than anticipated. Of course unit costs lag commodity coking coal volume recovering from fiscal 2011's bad rises, a cause for joy on the way up but amplified pain on weather. We also anticipate improved performance from the way down. We anticipate unit costs to stabilize aluminum and nickel, veritable laggards in fiscal 2011. We somewhat in fiscal 2012 in lagged sympathy with pricing. then expect earnings to level off on a cooling in commodities price growth from current stratospheric levels Net debt grew 76% off a very low base to $5.8 billion, and the impact of the mineral resources rent tax in though leverage is still paltry at 10%. This changes in the Australia. We forecast earnings of $4.75 per share in fiscal second half of 2012 with the $15 billion acquisition of 2013. Petrohawk Energy. But even then leverage will remain at sub-30% levels and diminish rapidly with very strong cash In line with expectations, BHP reported record underlying flows. BHP spent $11.6 billion in fiscal 2011 on capital fiscal 2011 earnings up 74% to $21.7 billion. That's 40% expenditure projects, with the largest 30% share going to above the previous highest mark of $15.4 billion set in iron ore, followed by oil, copper, aluminum, and coal. Group fiscal 2008. The group earnings before interest and tax returns on invested capital increased from 20% to 29%, in margin improved from 36% to a record 43% courtesy of line with the prior high in fiscal 2008. BHP is enjoying higher commodity prices, only partially offset by adverse unparalleled returns on capital invested at far lower prices exchange rate movements. Key in order of importance were than present--a key differentiator to other resource groups iron ore up 96% to $144 per tonne, copper up 28% to $3.90 that began substantially investing post-boom. per pound, oil up 18% to $90 per barrel, and coking coal up 63% to $238.50 per tonne. Volume effects, including the BHP stamped its optimistic outlook with a 22% rebasing of impact of weather on East Australia coal exports, pale in the full-year dividend to $1.01 per share (the final of $0.55 comparison. Underlying earnings per share jumped 76% to was ahead of our $0.52 forecast), "confident in the $3.94, outpacing gross profit courtesy of $10 billion in share long-term outlook for [its] core commodity markets." There buybacks. These reduced shares on issue by 4%. The was no dividend increase in Australian dollar terms, headline fiscal 2011 profit grew 86% to $23.6 billion, though, with the strong currency holding the payout to AUD including $2 billion pertaining mostly to reversal of deferred 0.98 per share. tax liabilities, noncash. A protracted recovery remains BHP's base case for the Cost pressures are evident, though outside of oil are in line developed world, with the potential for "a coordinated with expectations, given commodities inflation. Most policy response to engender confidence and ease the segments experienced 35%-40% rises in unit costs, though volatility that has been the dominant theme of recent
© 2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. ® The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. ß BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
Analyst Notes (continued)
years." With respect to the important growth economies of China and India, BHP cautioned that growth in fixed-asset BHP anticipates robust commodities demand in both the investment in China remains resilient and is yet to fully short and medium term, supported by intensive emerging reflect recent monetary policy tightening. economic growth--and if stimulatory policy is enacted, then more so. With respect to steelmaking raw materials, the This doesn't appear a major shift in BHP rhetoric; the company does anticipate growth in demand, particularly in company has been dovish on the near term for some China, to slow in the longer term to more sustainable considerable years while remaining confident in a strong levels. But the fundamentals even for these commodities long term based on ongoing urbanization in the developing remain compelling, given a constrained supply-side world. Evidence suggests it has considerably response and rising capital costs. underrepresented the near-term potential in recent years--why go out on a limb?
Jul. 27, 2011 BHP Billiton's Fourth-Quarter Operating Result Overshadowed by Petrohawk Bid BHP Billiton made an all-cash bid for NYSE listed lift that by a further 70% again to more than 200 billion Petrohawk Energy. The $38.75 a share offer values cubic feet and drive strong ongoing gas production Petrohawk at $15.1 billion including $3.0 billion net debt. increases. The near 50% premium BHP is paying should be The bid is 49.5% above the trading price at June 1, 2011 viewed in the context of that production growth. Petrohawk and has the unanimous support of Petrohawk directors. is not a particularly onerous lick for a company Petrohawk brings acreage in the Eagle Ford and Haynesville market-capped at BHP's $250 billion, but it should drive shales and the Permian Basin in Texas and Louisiana. It has strong production growth when aligned with such an approximately one million net acres with estimated 2011 enviable balance sheet. net production of 950 million cubic feet of gas equivalent per day--equivalent to approximately 158,000 barrels of oil We expect BHP gearing (net debt/equity) to push 40% per day. Proven reserves at the end of 2010 were 3.4 trillion levels with Petrohawk and share buybacks, but to rapidly cubic feet of gas equivalent (Tcfe). The further 32 Tcfe ebb to sub-10% levels within two years, all else being resource equates to a price of $0.39 per million cubic feet equal. Annual group net operating cash flow approaches of gas. BHP sees a decade of expansion ahead and expects $30 billion with the current favorable commodity tailwind. the petroleum division to deliver more than 10% growth a year. Having now modeled Petrohawk into our BHP numbers, we expect the acquisition to be mildly accretive to earnings per BHP shares have drifted back--to be expected given the share and valuation. We upgrade our valuation by 6%. Petrohawk bid. But if the Fayetteville shale gas Approximately half is driven by Petrohawk, with the bulk of performance is any indicator, Petrohawk should present the balance reflecting the roll forward in valuation model to little to worry about for shareholders. The Fayetteville the next quarter. The quarterly production result discussed acquisition boosted group fourth-quarter 2011 gas output below is a modest favorable influence also. Fiscal 2011 and by around 40% to 132 billion cubic feet. Petrohawk could 2012 earnings forecasts are little changed.
© 2011 Morningstar. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. Data as originally reported. ® The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security. Redistribution is prohibited without written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. ß BHP Billiton Ltd BHP [NYSE] | QQQQ
TM Last Price Fair Value Consider Buy Consider Sell Uncertainty Economic Moat Stewardship Morningstar Credit Rating Industry 80.49 USD 100.00 USD 70.00 USD 135.00 USD Medium Narrow . . Industrial Metals & Minerals
Analyst Notes (continued)