BHP Billiton
BHP Billiton (ASX:BHP) is a global leader in the resources industry.
Formed from a merger between BHP and Billiton, the company is a leader in the extraction and sales of most natural resources, and is particularily strong in Iron Ore, Coking and Thermal Coal, Copper, Zinc, Oil & Gas, Diamonds and most materials key to the production of steel.
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BHP's high production in weak demand puts pressure on higher-cost producers
As the world’s biggest mining company, the release of BHP Billiton’s (LSE: BLT) production results always provides an insight into the immediate health of commodity markets and global demand, as well as being a litmus test for the health of the mining sector generally. Just as significantly, in these tough times the results also allow some comparison between the company and its big resource peers.
Our overall view of the company’s result was that it was a pretty solid outcome and given the current economic circumstances it should hardly surprise investors that the company’s rhetoric remains cautious. BHP said it expected market conditions to remain uncertain in the medium term and that all of its operations would remain under review.
The demand for iron ore, coking coal and manganese remains weak. In its quarterly production report, BHP said iron ore customers had continued to request deferrals of material priced under long-term contracts, meaning it had been forced to sell a greater proportion into the lower-priced spot market.
But the company’s decision to keep iron ore production levels high in the face of deferred sales, along with the restart of the Samarco iron ore pellet plant in Brazil, is designed to keep up the pressure up on high-cost producers. BHP’s costs are low, which means it will be one of those left standing.
Last financial year the company said it was aiming for double-digit volume growth over the coming years. Both oil and gas production fell from the previous quarter and the company will also need a record quarter this quarter to meet consensus full-year expectations of about 137 million barrels of oil equivalent.
Following recent US bond raisings, speculation has grown that the miner is looking to buy assets at the bottom of the market and the March quarter report did little to dispel this. The company commented that it is actively looking at acquisition targets.
BHP Billiton’s finance arm recently sold US$3.25 billion of five and ten-year notes in what is the company’s first bond sale since 2007. Importantly, the US$1.5 billion of five-year notes is priced at a relatively low rate of 5.5%, whilst the US$1.75 billion of ten-year notes too are also priced at a relatively modest 6.5% rate.
This has given BHP a major advantage over its peers in terms of balance sheet strength, thus avoiding many of the financing and asset-sale headaches currently occupying the minds of the company’s resource sector peers. The company therefore remains well-positioned to look at acquisitions in the current environment without placing any real strain on its balance sheet.
Looking more broadly, BHP is in a position of financial soundness that most financial companies and banks can only dream about. Debts levels are low and the sustainability of its dividend payment should not be a problem. We believe this is the reason the company trades at a considerable premium to its peers, which currently reflects a strong price-earnings multiple of 11 times consensus 2009 earnings, rising to 14 times forecast 2010 earnings.
Disclosure: Interests associated with Fat Prophets declare an interest in BHP Billiton
Other BHP Billiton news
- BHP Billiton says restocking in China "largely complete"
2009-08-12 - BHP Billiton introduces new pricing mechanism for iron-ore
2009-07-30 - Analysts expect upbeat BHP quarterly results on increased Chinese demand
2009-07-21 - BHP expect market conditions to remain uncertain
2009-04-23 - Weakening demand weighs on BHP Billiton
2009-03-13
