BHP Is Best of the Miners - Barron's

The mining sector has been slammed by the global slowdown and falling commodity prices, and BHP Billiton (BHP) hasn't been spared. Still, if investors are willing to look past some expected short-term pain, Barron's Alex Wilson writes that BHP is the best long-term bet amongst mining companies.

The world's largest miner, BHP is uniquely placed to survive a long downturn thanks to balance-sheet strength and boasts a diversified global portfolio of long-life, low-cost, high-grade assets. The company has scored points with many investors and analysts for abandoning its year-long hostile bid for rival Rio Tinto (RTP), a deal which would have brought BHP's debt-to-equity ratio to nearly 50% from 13% at the time. BHP's debt-to-equity ratio has since fallen to 9.5%, leaving the company in a strong position to go bargain-hunting for assets in a depressed market.

Investors should bear in mind that some short-term pain is expected. For one thing, the company will likely face sharp price drops in H2. To cut costs, BHP has announced 6,000 job cuts, will shut a $2.1B nickel mine in Australia, and will pare back coking-coal production.

In Australia, BHP trades around A$32, and analysts see over a 10% upside over the next year. (The NYSE-traded ADR is trading around $45.)

• John Sevior, of Perpetual Asset Management: "If you want to hold one mining stock, BHP would be it."
• Warwick Cumming, a fund manager at Tyndall, says BHP is better-placed than its peers and attractively priced for long-term investment.

:::::::::::::::::::

• BHP Billiton: FH1 profit fell 57% to $2.62B, well short of the $4.4B analyst consensus. EPS fell 56% to $0.47. Attributable profit before exceptional items of $6.1B, short of $6.9B consensus. Impairment charge of $3.36B on Ravensthorpe nickel operation. Revenue +16.6% to $29.78B. (PR)
• The one-off cost of slashing 6% of its global workforce, shuttering an Australian nickel mine, and cutting coal production will come in at $500M. "Our biggest concern is not China, which alone is 30% of global consumption," CFO Alex Vanselow said.
• BHP abandoned its year-old hostile bid for Rio Tinto on turmoil from the global market. BHP execs said the deal would raise BHP's debt, make asset sales difficult and was no longer in shareholders' interests.

Comments

[Distressed ...:]

BHP is looking good, it was on fire Friday... Charted out BHP, Baltic Dry Index. China restocking definitely affecting everything. We'll see if the activity can hold. www.distressedvolatili...

Feb 07 09:02 PM

[Jim Hawthorne:]

Thanks, Rachael!

Indeed, BHP is a stand-out, and as 'DistressedVolatility' (above) notes, was indeed on fire on Friday! However, I wonder if BHP has to some extent 'cut off its nose to spite its face' and by circling the wagons into an overly defensive posture has severly limited future growth and expansion? (Uranium excepted, which may well be an error on my part!)

I prefer good old CLF, which is showing increased EPS along with better sales. As you can see, it, too, was on fire on Friday!

Feb 07 11:35 PM

[Ed S:]

Its a great co, but a short at this price IMO. Outperformance has been massive due to operational performance, low leverage.

But now cum a slew of earnings downgrades due to lower commodity prices.

I think It may trade at $A25 in the next 3 months (about -20% from current levels).

Feb 08 01:58 AM

[Maxe Paul:]

BHP should have taken over Rio Tinto back when Brian Gilbertson was in charge, but the board backed away from his then hostile bid. This has proved a very costly mistake, by trying to make a friendly approach at the top of the market.

Investors would be best to buy BHP on dips when, and if they launch bids for rivals or aquire assets going forward. BHP looks fully priced at these levels. There is definately more downside risk than upside in the current price.

Feb 08 02:55 AM

[Maxe Paul:]

BTW, im not sure what is up with your graph, but BHP was never $90 and is not currently $45.

Feb 08 02:57 AM

[SA Editor R...:]

Maxe-

The chart above is of BHP share movement on the NYSE. The 52-week high was $95.61 and Friday's closing price was $45.44.

-R.G.


On Feb 08 02:57 AM maxe wrote:

> BTW, im not sure what is up with your graph, but BHP was never $90
> and is not currently $45.

Feb 08 03:03 AM

[SA Editor E...:]

Yeah, those are the ADRs, not the raw shares. Closed Friday on the NYSE at $45.44.

finance.google.com/fin...


On Feb 08 02:57 AM maxe wrote:

> BTW, im not sure what is up with your graph, but BHP was never $90
> and is not currently $45.

Feb 08 07:43 AM

[deee:]

Could it be that old Slim from Mexico is on the prowl for a mining company. Noted friday on TV.


On Feb 07 09:02 PM Distressed Volatility wrote:

> BHP is looking good, it was on fire Friday... Charted out BHP, Baltic
> Dry Index. China restocking definitely affecting everything. We'll
> see if the activity can hold. www.distressedvolatili...

Feb 08 09:26 AM

[auto44:]

I think (bhp) is a good company with excellant corporate governance. I think they showed great restraint when it became apparent that the rio tinto deal was not a good thing to go foward with at this time. A lot of the greed that has ruined so many good companies lately has to do with the empire builder ceos that just want to rule over larger and larger companies instead of companies with good operations. It seems prestige and the opportunity to use stock holders as patsies often comes from total market cap. It is the opposite of being well paid for making good decisions for the stock holders for whom they are suppose to work. Long term my guess is that this is as good a company as you could invest in, but I also think it is still to early in the current state of affairs to deploy capitol into the stock market.

Feb 08 01:21 PM

[rostov:]

I posted this about 1/2 day ago, Singapore time (PostPosted: Tue Feb 10, 2009 9:37 am ), in the money section of a Singapore parenting forum:

----start of post ----

Gift from god to short from NYSE:BHP @ 52.1 . 61.8% retrace from start of hedge fund exodus 22nd Sep 2008. Right now into 3rd month of an ascending channel target $52-4. Right now it's sitting right on a 50% multi-week retrace. Dailies show moderate overbought on RSI, MACD (lagging), Stochastics, ElderRay, while ForceIndex(2) show a slight pullback. Weeklies tell the same story, with a 200wk sma at 49.72ish. Value investing wise and applying litmus test shows BHP actual 3-year historical EPS at 1.6 vs current/forward EPS of 10.71/14.96. With a book value of only 13.78, we have (P/E Ratio) X (Price:boot Ratio) = 96.63 ; this is 4.29 times above 15. Aspect Huntley internals reveal that total assets vs liabilities is 1:1

Conclusion:
1) Technically it's a crowded issue. We're in the middle of nowhere in terms of pricing, and the amount of pain would be -10% short term if wrong. The entry would've been around the 39 region where the bottom channel was. Technically it's ripening itself for a sell off at the end of a 4-5 month retrace after an overall index halving/crash (oct-nov 2008).

2) It's overvalued close to 4 times, enough to swap away value investors from going in. Who's buying BHP? Except for Lehman Brothers holding majority stake since 5th September 2008, there are no apparant institutional buyers either.

3) 1:1 asset to liability is a problem (2:1 would be a buy). After the fiasco of repeating their profits in 3 different areas of their report Dec 2008 (another red flag for value investors), and attempting to draw credit from Citigroup for it's attempted swallow of RTP (Rio Tinto), one would imagine they have limited LOC's. For 3 months now global central banks have been trying to FORCE credit to flow, and without any signs of it happening (just mouth breathing so far) and an eventual ramp of 10-year rates due to increased cost of government debt (thus pulling private debt costs up), liabilities ramping as a result would push this ratio higher and thus a riskier issue in one's portfolio.

My take:

It's a hot potato. Won't buy, sorry.


----- end -----


What's BHP's price NOW, shortly after this seekingalpha article came out? What's the proper valuation of BHP? *shakeshead*

-1.

Feb 10 04:18 PM