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Stockwatch: BHP Billition Limited (BHP)

May 31st, 2009 · Greg Atkinson · 6 Comments

BHP Billiton (ASX:BHP) is one of the most widely held stocks in Australia and is often a core holding in many stock portfolios. Over the last few years the stock have reflected the fortunes of the commodities boom and as a result the BHP stock price saw a peak last year of over $45 only to come tumbling down to less than $25 a few months later. But maybe at current prices BHP is once again a stock worth looking at?

Often people think of BHP as simply a large miner of iron ore and coal, but BHP is actually a widely diversified mining giant in terms of both products and geographically. The company has some 41,000 employees working in around 25 countries and according the company’s website has significant positions in aluminium, energy coal and metallurgical coal, copper, manganese, iron ore, uranium, nickel, silver and titanium minerals, and also substantial interests in oil, gas, liquefied natural gas and diamonds.

BHP businesses include:

  • Aluminium – BHP is the sixth largest producer of primary aluminium and has operations in several countries including South Africa, Brazil and Australia.
  • Base metals – the company a leading producer of copper, silver, lead and uranium. Within this business BHP operates Olympic Dam which is the world’s fourth largest deposit of uranium. It also contains significant quantities of silver, copper and gold.
  • Iron Ore – BHP is one of the world’s major suppliers of iron ore with operations in Brazil and in the Pilbara region of Western Australia.
  • Diamonds & Speciality Products – this group covers BHP’s diamonds and titanium operations.
  • Manganese – BHP is ranked number one in the world in seaborne supply of manganese ore and in one of the top three producers of manganese.
  • Energy Coal – BHP is one of the world’s largest suppliers of thermal coal to Europe, Asia and the US.
  • Metallurgical Coal – the company is the largest supplier of seaborne traded hard coking coal and also supplies a range of other coals.
  • Petroleum – many Australia’s probably do not fully appreciate that BHP has significant oil and gas interests and that the company has invested heavily in recent years in exploration. It would seem BHP is betting on the long term demand for oil and gas.
  • Stainless Steel Materials – BHP Billiton is the world’s third largest nickel producer. This business also supplies cobalt.

So BHP is not simply a coal or iron ore play. Owning BHP shares gives investors exposure to a wide range of commodities including uranium, which is something I feel will be in great demand in years to come as new nuclear reactors are put into service in places such as Japan, Europe, Russia and China.

In 2008 BHP had an attributable profit (excluding exceptional items) of US $15.4 billion and a net operating cashflow of US$18.2 billion. That is serious money in anyone’s language.

Even after the recent rout on the share market BHP is one of those stocks that shows investors that sometimes you are better off just hanging on and not selling along with the crowd. Just imagine how you would feel now with BHP shares up around $35 if you sold them down around $25 back in late 2008!

BHP Billiton Limted (ASX: BHP) 10 year price chart.


You can also see quite clearly that if you had invested in BHP prior to 2008 you would still be ahead, and well ahead if you had invested back when the prices hovered around $10 for many years around 2000-2003.

Back in May 2008 when BHP shares were trading around the $40 mark the P/E ratio was around 16 but it has since dropped back to around 15, but of course you need to have some confidence in the earnings outlook to trust that figure.

At around the current price the stock also yields a dividend of 2.2% which is not exactly something to get excited about, but it is fully franked which helps at tax time.

I also like the ROE (Return on Equity) which has been above 40 since 2005 and the Net Profit Margin which was around 25% as of 2008/06. These numbers will probably get knocked around because of the fall in commodities prices but they are still likely to hold up fairly well.

If you believe that the demand for commodities will pick up again and that we are in the middle of what Jim Rogers describes as a long term commodities super-cycle, then BHP might be a good stock to look at.

Disclosure: the author of this article has a direct and indirect interest in BHP shares and wishes he had purchased more when they were around $25 last year!

6 responses so far ↓

  • 1 Pete // Jun 7, 2009 at 12:03 am

    I had a sizeable holding of BHP in 2007.

    Now I wouldn’t even consider picking any up at more than $20 a share. I think there is even potential for them to get back to $15.

    They have pretty slim dividends, so if you want them for dividends then you need to really expect much greater earnings, and therefore share-price(capital) appreciation, for the future.

    BHP is in a reasonably good position, having very little debt at the moment, unlike Rio Tinto. They are the heavyweights around these parts, so you know your capital would never be reduced to zero, but there is potential to go to less than 50% of the current price.

    Without getting into the topic of ‘Chinese demand’, I will touch on the topic of ‘Chinese respect’. Both BHP and Rio have not been playing nicely with China. Perhaps they know something we don’t. However, if the Chinese Gov. decided to ban any purchases from Rio or BHP, that would virtually ruin those companies. It’s an unlikely event, but here we have a situation whereby BHP and Rio are completely RELYING on China to support their sales, yet they are not playing nicely with China in return. I’m no market strategist, but I don’t see that as particularly wise when there are other resource alternatives such as Brazil, Africa and Tibet (Tibet has rumoured high potential).

    Therefore I see more risk in the bluechips BHP and Rio than many others appear to. Obviously the accuracy of these assessments will only be shown in time. One consideration that should be made is ‘what are the assumptions we make about BHP?’. And which of those could be the undoing of an investment strategy?

  • 2 Pete // Jun 7, 2009 at 12:23 am

    Incidentally Greg, I don’t see the point of the ‘what ifs’ in your commentary. The ‘what if you bought at $10’, etc.

    I can think of quite a few alternatives that had 500% increases within MONTHS that I would rather have. Its all hindsight, and somewhat meaningless to point out (I could speculate some ‘what ifs’ about times in the Casino).

    I think there is much more value in assessing why something changed value. If I find a share interesting I usually add it to a watch-list and monitor any news and changes over time. Sometimes I see a huge jump in price and I try and figure out why, and what prior indicators were there? Understanding the changes in value is ultimately of much more assistance than regret.

    Personally I have been trying to temper the emotion of ‘greed’ as much as I can since I started trading. I get better at it every day, but I know it will never completely go away. I see the influence of greed everywhere I look…

  • 3 Greg Atkinson // Jun 7, 2009 at 9:22 am

    Pete – BHP shares were once around $10, that is simply a fact. If I show a price chart it is hard not to talk about stock prices.

    As for China and demand, of course the Chinese will play hard with prices. This happens over time with most buyer-supplier relationships. But China is not the only buyer and if demand picks up Japan may agree to a price hike and so the old price negotiations will enter a new cycle. Recently the Chinese agreed to iron ore prices first negotiated with the Japanese, Koreans and Taiwanese, so China is quite clearly not the only global price giver.

    In addition when times are tough high cost mines are shut and new mine construction is put on capacity is taken out of the system. Thus we get back to the basics of supply and demand. Yes there are mines in Africa and Asia etc but are they low cost operations and how much can they reliably supply? Also BHP is highly diversified so they have more to sell than just iron ore and coal. (BHP also gives investors exposure to gold and uranium for example)

    Still times are not going to be good for most miners over the next few years. The question is, will BHP come out of the current global downturn in a stronger and more dominant position?

  • 4 Pete // Jun 7, 2009 at 5:14 pm

    I agree that BHP could be in a great position coming out of a downturn.

    However the assumptions made are:
    – BHP will not have much competition
    – resources will be strongly in need

    Based on what you have said about mine development, it looks like BHP probably won’t have a lot of short-term competition. However if someone like China decided to heavily invest in mine operations elsewhere DURING the slump, then that could give them time to get mines operating.

    BHP is definitely in a good position for export diversity. It has a bit of everything. Uranium is a good one, especially if it is hard to come by elsewhere. I guess a question is, how much Uranium would BHP have to sell to maintain a decent P/E ratio, if other resource prices collapsed? You could ask that question of all of the resource types I guess, depending on the proportion of export potential for each resource. I wonder if iron ore did not have strong demand, would BHP’s share price warrant a $35 price tag, or would $15 be more realistic?
    Hard questions to answer.

    Personally I am not particularly interested in BHP. Blue Chips strike me as somewhat ‘arrogant’, in the sense that they may appear valuable just because of their status. I especially think that of our big four banks.

  • 5 Greg Atkinson // Jun 7, 2009 at 5:36 pm

    Pete – yes it is hard to work out how to value mining stocks that is for sure. We need to make a lot of assumptions regarding demand and commodities prices but at least during a slump a lot of bad news is already priced into the stock….but of course we have to ask..has enough bad news been price into the stock?

    China has been pumping a lot of money in mine operations in Africa, I must see if I can find a bit about how they are going. I know Zambia for example where the Chinese have been pretty active has been hit hard because of the slump in commodities prices so maybe the operations in many African countries have quite a high cost base. (not that easy to get the stuff out of some of those land-locked countries)

    Blue chips stocks do normally trade at a “quality” premium but that is why nasty corrections can be good buying opportunities as the prices for these blue chips also get hammered, and it makes them a more attractive …if you feel they will recover of course!

  • 6 Senator13 // Jun 7, 2009 at 8:38 pm

    I think you could do far worse then owning a part of BHP. They have the track record, good management, diversified and they have the size, minimal debt and well placed in terms of the competition. I don’t really see too much else out there at the moment in the ASX300 that could top it in this current climate.

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