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Dean Mico
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I manage a private investment fund in Australia known as The Edge Fund. I invest in the best Australian stocks using a value investing methodology. I overlay this with technical analysis to buy low and sell high. My website is www.edgeseven.com.au
My company:
Edge Seven Pty Ltd
My blog:
Edge Seven Value Investing
  • BHPLF.PK (ASX: BHP) - BHP Billiton Limited 0 comments
    Jul 23, 2012 1:13 AM | about stocks: BHP, BHPLF

    The Big Australian is on a diet

    BHP Billiton Limited (ASX:BHP) is a leading global resources company. BHP consists of a global portfolio of large, low-cost, expandable assets diversified by commodity, geography and market. BHP is among the world's largest producers of major commodities, including aluminum, copper, energy coal, iron ore, manganese, metallurgical coal, nickel, silver and titanium minerals, and uranium along with substantial interests in oil and gas.

    BHP aims to be the supplier of choice to its end-use customers. Its strategy is three-pronged: build on its diverse reserves base and ensure that best practices are shared quickly across its operations; maintain a steady pipeline of greenfield projects for internal growth; and help increase its pipeline by staying close to its customers.

    BHP employ about 100,000 employees and contractors and the company operates in over 100 locations throughout the world.

    Does this business have a sustainable competitive advantage?

    BHP's competitive advantage comes from its diversified, low cost asset base. The diversification provides a resilient cash flow by reducing our exposure to any one commodity or currency and provides for more predictable and robust financial performance. It also allows the company to invest in and grow their business throughout economic cycles with the intention of delivering superior long-term value to shareholders.

    BHP has an unrivalled portfolio of high quality growth opportunities aimed at meeting the changing needs of their customers. This portfolio will also act to serve the resource demand of emerging economies at every stage of their growth.

    BHP owns and operates its assets under a simple and scalable organisational structure. This structure is supported by standardized and controlled processes allowing their staff to operate in a streamlined manner.

    What are the risks facing this business?

    In short, declining global growth prospects in the short term are lowering commodity prices. This is diminishing the profitability of the company at the moment.

    This diminishing profitability is despite robust operating performance with annual production records being achieved across ten of their larger operations.

    Is it run by able and trustworthy management?

    In my view, management is very able and trustworthy. They present a consistent message about the long term and act with the same consistent approach. Marius Kloppers has been the CEO of BHP Billiton since October 2007. I feel like I learn something every time I see or hear Mr Kloppers speak in the media or at company presentations.

    It is widely reported that the company overpaid for its $20 billion acquisition of Petrohawk Energy. However, the company maintains that the Petrohawk asset is a great acquisition that will serve the company for many years to come. You may recall that BHP walked away from its bid for Canadian company Potash in 2010 because it did not wish to pay a premium for that asset.

    Debt levels across the business rose from about 10% in June 2011 to over 30% by December 2011 as a result of the Petrohawk Energy acquisition.

    Is it trading at a bargain price?

    BHP is trading at a significant discount to valuation however this is largely a result of poor sentiment for our mining companies amidst weak growth globally. Sentiment is likely to remain this way for the foreseeable near term particularly given the companies declining profitability as shown in the table below.

    Year20072008200920102011201220132014
    Return on Equity50.6%42.9%34.5%29.4%42.1%25.9%25.3%23.9%

    *Please note that 2012, 2013 and 2014 profitability levels are forecast only and subject to change on a weekly basis.

    In time, we will reach an inflexion point which will lead to an improvement in sentiment and profitability. This should see share prices heading back towards valuation.

    Rank2011 Actual ValuationToday's Share PriceMargin of Safety2012 Forecast Valuation2013 Forecast Valuation2014 Forecast Valuation
    Gold 2$93.68$31.3636.34%$49.26$57.73$67.95

    *Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

    It is interesting to note that the changes in profitability in the first table presented seem to reflect the change in share price in the 5 year price chart below.

    (click to enlarge)

    Summary

    In summary, BHP is a very profitable company with a global collection of large, low-cost, expandable assets diversified by commodity, geography and market. The company has experienced management who are working to maintain the clear long term strategy of the business. The company appears well positioned to take advantage of growth opportunities once an inflexion point for global growth is reached.

    Disclosure: Dean Mico does have a small interest in BHP in his SMSF.

    This article is published by Dean Mico.

    The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

    Disclosure: I am long OTCPK:BHPLF.

    Additional disclosure: I have a small holding of BHP in my self managed super fund but no plans to add or reduce my position in the next 72 hours.

    Stocks: BHP, BHPLF
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