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BHP (ASX: BHP, LSE: BLT) – BUY Rating on higher copper and oil prices; better realization of US shale portfolio

With positive outlooks on copper and oil prices, BHP looks set to take advantage to provide additional earnings to its shareholders. Backed by its stable iron business, the company looks set for strong growth with limited downside. With a strong balance sheet and a great track record of providing dividends to its shareholders, BHP is a robust commodity business that has proven its capabilities to manage times when commodity prices are low.

Even though the company has no hedging positions in its commodities, we see this as a positive sign in view of the rising copper and oil prices.

The projected price of A$36.52[2] represents a 8% upside on the current price of A$33.91 as of 29 June 2018. We initiate a BUY rating for BHP Billion Limited. We believe that BHP has a commodity portfolio that can take advantage of rising commodity prices, maintaining its position as one of the biggest commodity players in the market.

Potential catalysts/events to look out for:

The proposed US shale portfolio sale for BHP could yield a better than expected realization, with initial forecasts at US$9 billion. We expect a higher realization of BHP’s US shale portfolio due to the presence of multiple interested parties including big players like BP and Blackstone.

BHP has ramped up production for copper by a significant amount, leveraging on the increase in copper prices and positive industry outlook. We hope to see BHP ramping up production in oil in the future to take advantage of the rising oil prices.

Mining giants like Rio Tinto and Anglo American are already divesting away its coal assets, and we believe that BHP should consider divesting its coal assets based in Australia due to the grim price outlook for coal and the susceptibility of its coal mines in Australia to natural disasters.

Summary

  • Unhedged commodities prices causing volatility in revenue and earnings
  • Track record of paying dividends in spite of losses
  • Large cash position and current debt levels representing a robust balance sheet
  • Good prospects for realization of its sale of US shale portfolio
  • Competitive advantage in size and diversification of assets
  • Iron ore business as BHP’s core and stable commodity
  • Positive efforts at reduction of operating costs
  • Positive industry outlook for copper and oil & gas; grim outlook for coal

Business Introduction

BHP is an extremely large mining company listed on the ASX and is the 2nd largest mining company in the world by revenue[3]. BHP has its commodities portfolio mainly in copper, iron, coal and petroleum (oil). The assets and operations of BHP is geographically diverse, with its operations in Australia, Canada, United States, Chile, Peru, Columbia and Brazil. BHP has non-controlling interest in production operations in Trinidad and Tobago, Algeria and the United Kingdom. The main marketing office of BHP is in Singapore and they run another marketing office in Houston, United States.

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Source: Various articles[4] [5] [6]

In terms of production levels, BHP is the second largest producer in the world for coal, third largest producer in the world for iron, and fourth largest producer in the world for copper. The size of BHP in the aforementioned provides the company with competitive advantage in terms of economies of scale. This occurs when more units of the goods can be produced on a larger scale with lower operating costs. BHP has been able to leverage on the aforementioned to lower its operating costs. This shall be further elaborated under the section “ Positive efforts at reduction of operating costs

In 2001, BHP Billiton Limited (an Australian-listed company) and BHP Billiton Plc (a UK listed company) entered into a Dual Listed Company (DLC) merger. These entities operate together as a single for-profit economic entity with a common Board of Directors, unified management structure and joint objectives. In effects, the DLC structure provides the same voting rights and dividend entitlements from BHP Billiton Limited and BHP Billiton Plc irrespective of whether investors hold shares in BHP Billiton Limited or BHP Billiton Plc.

Strong but Volatile Financial Position

Unhedged positions on commodities and its effects on Revenue

BHP does not hedge its commodity and currency prices and they take the prevailing market price of their assets, with the exception of shale gas. We will expect the company’s revenue and earnings to be fluctuating significantly due to the inherent volatility of commodity prices.

123.jpg The effects of the unhedged positions in its commodities can be clearly seen by the significant decline in revenue from FY2013 to FY2016. The decline in iron, copper and coal prices, which makes up the core of BHP, caused its revenue to decrease significantly to its lowest level at US$29.4 billion in FY2016. Commodity prices fared better as a whole from 2017 onwards, thus boosting its revenue in recent times. Profit after tax has decreased significantly and BHP even recorded US$6.2 billion in losses in FY2016, before recovering in FY2017.

Overall, the decision to leave BHP in an unhedged position exposes the company to volatility in its earnings. This may have a positive or negative effect on its earnings, depending on the movement of the prices of the commodities.

Track record of providing dividends to shareholders

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BHP has a clear capital allocation strategy to provide value to its shareholders. Besides trying to increase productivity and maintain a strong balance sheet, the company has promised a minimum of 50% dividend payout ratio.

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In the previous few years, the company has been maintaining a high dividend payout ratio, providing consistent dividend to its shareholders. We will like to note that in FY2016, despite recording losses, BHP was able to utilize its large cash position to continue distributing dividends to its shareholders. It is evident that BHP strives to issue dividends to its shareholders. The track record of providing dividends consistently to its shareholders makes the BHP shares attractive. Furthermore, the company can utilize its strong cash position to issue dividends when the company is suffering losses, thus BHP shareholders will be assured of dividends in spite of the volatility of commodity prices.

Strong Cash Position

BHP has cash and cash equivalents of US$14.15 billion as of FY2017. The availability of liquid assets on its balance sheets provides the management with the option to invest in expansionary capital or pay off its debts should the need arises. This is a positive sign of a strong and robust balance sheet.

Key financial ratios[7]

123.jpg As BHP does not take hedging positions in its commodities, it is expected that its earnings, profit margins and asset turnover will be volatile. Therefore, looking at returns and profit margins yearly might not provide valuable insights on the actual financial position of the company. Even so, the 5 year averages may provide a decent representation of the company’s long-term financial performance. The 5-year average ROA at 5.08% is comparable to the industry average ROA of 5.63%, ROE is low at 8.51% as compared to the industry average of ROE of 14.82%, while BHP’s 5-year average asset turnover of 0.39 is also lower as compared to the industry average of 0.58. This implies that BHP may not be as efficient with its assets to generate revenue and profits as compared with its peers. Even so, we believe that BHP is on track to increase its revenue and earnings in the next few years, thus its key ratios will improve in the future.

Debt-to-Equity ratio

123.jpg The D/E ratio was higher than the 5-year average in FY2016, recorded at 61%. This can be attributed to 2 main causes. Firstly, a significant decline in commodity prices resulted in losses recorded in FY2016. Secondly, the Fundão tailings dam which was jointly operated by BHP had failed, caused huge environmental damages to the nearby communities. BHP had to jointly provide an interim security worth US$395 million in insurance bonds, US$30 million in liquid assets and a charge[8] of US$245 million over the joint venture assets, which added to the losses recorded in FY2016.

The company has maintained a relatively steady debt-to-equity (D/E) ratio over the past 5 years, with the only exception being in FY2016. We assume that the company has its optimal D/E ratio set at approximately 49%.

Synthetic credit rating

A company will be able to attain a higher return to equity with higher leverage but this might cause the company to be more risky. In order to quantify the risk of the company in terms of its debt, we shall determine the synthetic rating of the company through key financial ratios, based on Moody’s Financial Metrics Key Ratio[9]. The financial ratios containing EBITA were excluded as BHP does not separately disclose amortization expenses.

123.jpg Based on the key financial ratios above, the synthetic credit rating for BHP is Aa. This is mainly due to the strong financial performance in the past year for BHP. This provides a clear indication that BHP will be able to pay off its debt in due time, therefore the debt is not likely to be accompanied with any potential financial distress costs for BHP. This provides BHP with the opportunity to increase its returns for its shareholders by taking on additional leverage. We look at its huge cash position as further indication of its capability to repay its debt.

The synthetic rating Aa will be used to determine the Weighted Average Cost of Capital (WACC) under “WACC”.

Business Analysis

Key commodities

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We have excluded FY2016 as the company recorded huge losses, hence it will not serve as a meaningful data point to determine its core commodities. Based on the revenue and profits by segments in FY2015 and FY2017, the core commodity of BHP is iron ore as it is the biggest share of revenue and profits for BHP consistently.

Thereafter, copper and coal are important commodities to BHP due to its revenue size as well as its contribution to profits.

Petroleum makes up a large portion of its revenue, but BHP has been unable to make its petroleum business profitable. However, as mentioned under “Industry Outlook”, we hope that BHP will focus on its petroleum business in order to take advantage of rising oil prices.

Proposed sale of US shale assets (petroleum business) [10]

As the petroleum business is unprofitable, BHP has disclosed plans to sell its US shale portfolio in 2017, which makes up approximately a third of their petroleum business[11]. BHP has recently received first-round bids from numerous parties for its US shale portfolio. Interested parties include major private equity firms and oil majors like Blackstone and British Petroleum respectively. With huge interest garnering around the sale of these assets, it is very likely that BHP will receive US$10 billion for its US shale portfolio. The sale of the US shale portfolio is expected to be finalized in 2019[12].

Major buyers of its commodities

BHP has 77% of its total sales revenue in Asia, mainly from China. With its main Marketing & Supply office in Singapore, BHP is able to locate its offices strategically in close proximity to its key markets. Therefore, BHP is able to tap on expertise and experience in the Asian markets by the locals. This eases the securing of sales in the region, development of sustainable relationships with its consumers and management of supply chain risks. With most of its sales in Asia, we see its strategic Marketing & Supply office location as a positive sign that the company will be able to continue boosting its sales, especially in China and India.

Size as a competitive advantage

As one of the largest global shippers of commodities, BHP is able to secure high quality and low-cost freight to deliver commodities to its customers. This allows BHP to reap economies of scale in terms of its delivery of commodities to its customers. As one of the largest producers of iron, coal and copper in the world, BHP has the potential to crowd out smaller producers by ramping up production and achieving economies of scale, maintaining its high margins and relationship with its customers.

Diversification as a competitive advantage

With a diversified portfolio of commodities, BHP claims to be able to protect the companies from factors that impacts any single market or commodity. However, the company suffered losses in FY2016 due to weak copper, iron and oil prices. This was further exacerbated by the exceptional losses suffered from the failure of the Fundão tailings dam and impairment of onshore US assets related to its petroleum productions. Therefore, unless BHP takes up hedging positions to protect its commodity prices, the diversification of its asset portfolio does not provide adequate protection against short-term price volatility.

The diversified portfolio of commodities does still provide an advantage as the company can choose to focus on commodities that are doing better with little to no cost of switching as BHP already possesses the capital assets and expertise as BHP holds positions in a variety of commodities. This provides a long-term advantage as the company will be able to focus on other commodities should there be a persistent drop in price or a lack of success for any one commodity.

Positive efforts at reduction of operating costs

We shall look at the level of success of BHP’s capital allocation strategy to increase operating productivity and reduce operating costs. A reduction in operating costs increases its net income, ultimately providing additional value to its shareholders.

Operating costs of Iron

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BHP has been extremely successful in reducing its operating costs for its iron operations, achieving approximately 50% reduction in costs since FY2013. This is especially important for BHP as iron is its main commodity as mentioned under “Key commodities”, which allows BHP to increase its overall profit margin more significantly. FY2018 cash cost per tonne for iron is expected to be approximately US$14 per tonne, which represents a slight improvement year-on-year.

This is a clear sign that the company is adhering to its capital allocation strategy which focuses on operating productivity and a strong balance sheet to provide returns to its shareholders on a consistent basis.

Operating costs of Copper[13]

BHP has been successful in reducing its operating costs (excluding exceptional items) for its copper operations in FY2017. Its copper operations had attained a cash cost per pound of US$1.06, which was a improvement from the US$1.17 attained in FY2016. However, this excluded strike-related costs at its Escondida mines in Chile. Factoring in the above, we find that the overall cash cost per pound for FY2017 was US$1.21. We will like to note that even though the strike was a one-off event, current year news reports suggests that strikes will be likely especially in its Escondida mines[14] [15]. Therefore, it can be concluded that the company has performed well in reducing operating costs, but these productivity gains are wiped out by the strike-related costs for the company. As cash cost per pound excluding exceptional items for copper is expected to be approximately US$1.00 for the current financial year, we will expect the operating costs to be approximately at FY2017 levels.

Operating costs of Coal

Cash cost per tonne for coal has increased from US$50.83 in FY2016 to US$53.75 in FY2017. This can be attributed to the impacts of Cyclone Debbie[16]. Landslides caused by Debbie have halted operations connecting its coal mines in Queensland to the ports. The decrease in production and the one-off repair costs resulted in the increase in cash cost per tonne for coal in the current year. BHP’s coal mining areas are located in the North Western Australia region which is susceptible to cyclones[17], as such, we will expect cash cost per tonne for coal to be approximately at current levels due to the potential threats of natural disasters.

Operating costs of Petroleum

Cash cost per barrel of oil equivalent (Boe) has increased slightly from US$8.63 in FY2016 to US$8.82 in FY2017. However, as BHP will be selling its unprofitable US shale portfolio in the near future, we will expect the cash cost per Boe to improve.

Relatively strong production rates for FY2018

Production rates for FY2018

123.jpg Current year productions rates are solid, if not spectacular. Its iron operations are on course for a slight increase In production in FY2018. Coal productions are also set to increase slightly from FY2017 levels, reversing the trend of decreasing production rates since FY2015.

Its copper operations have performed spectacularly and is on course for a minimum of 28% increase in production rates year-on-year. This will bring copper production levels back to its FY2015 levels. The increase in production was due to the increase in production volumes in the Escondida mines; we will like to note that this is made possible even with the possibility of strikes in the Escondida mines in the current financial year.

The lower production rates for its petroleum business was expected due to natural field decline[18].

Future outlook

Overall, BHP has performed well in terms of production, maintaining production levels for iron and coal, while performing exceptionally for its copper operations. Its petroleum business is not performing up to par, but we look at its sale of its US shale portfolio as a positive sign that BHP is taking the right steps to improve productivity and divesting away its non-profitable assets. Coupled with the analysis of production under “Industry Outlook”, we can conclude that BHP will be able to remain competitive in terms of production in the future.

Industry Outlook

Overall commodities outlook

According to McKinsey’s reports, declining ore quality, limited accessibility of new deposits and will squeeze supply in the coming years, potentially driving a commodity-price rebound[19].

Cost inflation

Based on McKinsey’s outlook on the mining industry, cost inflation due to internal factors will plague all commodities. Most mines will suffer from declining ore grades and deteriorating mine conditions, such as deeper shafts and longer hauling distances. McKinsey estimates that geological cost inflation will be the main determinant of cost increases and total inflation will average 4 to 7 percent going forward[20].

Iron outlook[21]

123.jpg Iron ore prices have eased since rallying in the opening months of 2018. However, we expect iron ore prices to decline in subsequent years as Chinese economic growth refocuses away from heavy industry to services, dampening global demand for iron ore.

Iron ore production is forecasted to decline slightly over 2018-2027, averaging a annual contraction rate of 0.4%. Australia will still be expected to remain as a top global producer of iron ore. China accounts for 84% of the iron ore exports from Australia.

Major players such as Rio Tinto and BHP will be expected to stick to their production growth targets to crowd out high costs producers, leveraging on economies of scale in production.

Overall, BHP looks set to maintain production levels, albeit achieving lower revenues due to the decline in iron ore prices. Given that iron is BHP’s core commodity, BHP should continue to maintain its iron ore business as iron is still capable of generating earnings for the company.

Copper outlook[22]

123.jpg Global copper demand looks set to grow steadily over the coming years, driven by the power industry and a generally positive global economic outlook. Copper demand will benefit from the rise of electric vehicles and the increase in usage of renewable energy sources such as solar energy. BMI has forecasted a 2.6% annual growth in demand over the next 10 years.

Global copper production will maintain steady growth at an average of 2.7% annually. Top producers look set to take advantage of increasing prices due to steady demand growth.

Overall, BHP looks set to be able to profit from the positive copper outlook, and the large increase in copper production in FY2018 as mentioned under “Production rates for FY2018” is a positive sign of the robust diversified strategy of BHP as the management looks to take advantage of rising copper prices by ramping up production.

Coal outlook[23]

123.jpg The Australian coal industry is set for limited production growth due to historically weak prices, environmental regulations and increasing competition from lower cost foreign producers (such as in Columbia) weighing on production. Major diversified miners such as Anglo American and Rio Tinto have been offloading coal mines in recent years.

Furthermore, with the increasing focus on environmental protectionism, this will increase the opposition to coal projects. In recent years, the government of New South Wales (NSW) had paid Shenhua, a Chinese coal company, to buy back coal exploration licenses. The government of NSW also paid BHP to block coal mining in the Liverpool Plains region.

Overall, the long term outlook of coal in Australia is grim due to the factors aforementioned, coupled with increasing competition from cheaper producers in Columbia and Panama. This affects BHP as it has coal assets in Queensland and New South Wales in Australia. However, BHP also has coal assets in Columbia and will be able to tap on the lower production costs there to increase its profits in the future. In the long term, we will expect BHP to divest its coal assets in Australia.

Crude oil outlook[24]

123.jpg Oil and gas demand is set to increase supported by economic activity in emerging economies. Oil prices have been low at approximately US$50 per barrel in the past few years. However, the market is set for a recovery and we are bullish about oil prices.

Shale will face cost pressures and will face limited growth opportunities in the near future due to the squeezed margins. However, BHP is looking for buyers for its US shale assets, hence this will not affect BHP’s earnings.

Liquefied natural gas is set to face lower prices due to a significant increase in supply from Australia and US, but this will be slightly mitigated by the forecasted increase in demand for liquified natural gas.

With the positive outlook towards oil prices, BHP should place more focus to develop and build on its petroleum portfolio. However, its current petroleum portfolio is unprofitable, partially due to the depressed oil prices over the past 2 years. With a bullish outlook on oil prices, we expect BHP to be able to turn a profit for its petroleum business. We also look at BHP’s intent at selling its unprofitable US shale portfolio stated under “Positive efforts at reduction of operating costs” for further validation of their potential to reduce operational costs for its petroleum business in the future, as shale will have its margins squeezed in the future.

Business Risks & Mitigation

Lack of hedging of its commodities

As BHP does not take any hedging positions in its commodities, it will have to accept the prevailing market rates for the commodities. Given the volatile nature of commodity prices, we will expect BHP shares to be correlated to commodity prices as well.

As mentioned earlier under “Strong cash position”, the company has large cash reserves and will be able to sustain a short period of depressed commodity prices. We see this as a positive sign that the company will be able to protect its downside, while maintaining the possibility of reaping additional earnings for its shareholders when commodity prices rise above expectations.

Business Transition to other commodities

Given the grim outlook for coal, we will expect BHP to divest its related assets in the future. BHP might find difficulties in finding other commodities to replace its lost revenue. However, given BHP’s outstanding track record in the commodities market, we believe that BHP will be able to rise to the challenge. In particular, it will be extremely positive to see BHP involved in future gold projects in Australia due to the strong positive outlook for the gold mining sector.

Increasing operating costs

McKinsey forecasts expects that deeper shafts and longer hauling distances will cause margins for all commodities to be squeezed in the future[25]. We expect its copper, coal and iron mines to face the same fate in the very long term, while its petroleum business should not be affected at all. Therefore, we will use a slightly prudent terminal growth assumption when conducting the valuation of BHP.

Valuation

Growth till 2028 and beyond

The growth assumptions as mentioned under “Industry Outlook” will be used to project the growth of the individual commodity segments. We will expect stronger growth from its copper and petroleum business, while its iron ore segment will perform modestly. We will expect its coal business to decline in the future due to the lack of growth opportunities in the coal sector due to weak prices.

We use the Australia’s 5 year average GDP growth rate of 2.43%[26] as a benchmark. To factor in the increasing operating costs for its copper, coal and iron mines in the long term, we use a slightly prudent terminal growth rate of 2% to project our free cash flows for the company in order to reflect the tightening margins.

Operating expenses

As BHP has been able to maintain its operating expenses at healthy levels over the past few years, we are positive that BHP will be able to maintain the current trend.

Given the large increase in productivity in its iron segment in recent years as mentioned under “Operating costs of Iron”, we assume that BHP will be able to keep its operating costs of iron at current levels.

For copper and petroleum, we assumed that operating margins will increase due to rising copper and oil prices.

We assumed a slight increase in operating costs for coal due to its historically weak prices.

WACC

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The bottom up beta approach was used in the calculation of the cost of equity. The beta was levered based on the D/E ratio of 49% as mentioned under “Debt-to-Equity Ratio”. The guideline companies[27] are chosen based on the size of their business and their position in diversified commodities.

The cost of debt was found by taking 10-year AUD-denominated corporate bonds and implementing a regression based on the credit ratings and their yield to maturity[28]. We utilise the synthetic credit rating Aa determined under “Synthetic credit rating” to determine BHP’s cost of debt.

DCF analysis

123.jpg We used a WACC of 8.42% and a terminal growth rate of 2.00%, with the current exchange rate of AUD/USD of 0.75[29]. The intrinsic value of BHP is measured to be A$36.52. This represents a 8% upside from the current price of A$33.91.

Relative Valuation

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These guideline companies were chosen based on the size of their business, as well as their position in diversified commodities.

Based on the TEV/EBIT ratio for the guideline companies, BHP is correctly priced by the market. The fair value of BHP based on the average TEV/EBIT of the guideline companies is A$33.53. This suggests that BHP is performing up to par as compared to its peers in terms of its operating margin.

Based on the P/E ratio for the guideline companies, the fair value of BHP is A$19.21. This can be attributed to the higher P/E ratio of BHP as compared to its guideline companies. However, we believe that BHP is not overvalued, as the company possesses petroleum assets which many other guideline companies do not. With a positive outlook on oil prices, we expect BHP to be able to increase its earnings at a faster pace than its peers. Therefore, the relative valuation using P/E ratio does not provide a comprehensive valuation of BHP, as it does not take into account BHP’s better growth opportunities.

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Source: Author’s calculations[30]

Conclusion

In conclusion, we place a BUY rating on BHP shares, in view of the rising copper and oil prices. BHP looks on course to leverage on these opportunities and provide significant earnings growth in the next few years. BHP’s iron ore business will ensure a buffer for its earnings due to the stable (albeit slightly declining) iron prices, coupled with strong management of its iron ore mines in terms of productivity.

BHP’s strong balance sheet and track record of providing dividends to its shareholders further enforces the attractiveness of BHP shares.

Even though BHP does not hedge its position on its commodities, it might potentially gain from the increase in commodity prices, especially in current times when commodity prices are on the uptrend. Nonetheless, it will be wise to track oil, copper, iron and coal prices, which will provide an indication of any potential buying and selling opportunities should the commodity prices rise and fall respectively.

Lastly, even though BHP is one of the largest producers of coal in the world, we see its coal business in Australia as unprofitable in the long run, and we hope that BHP will divest its coal assets based in Australia, and focus on its other profitable commodities instead.

Appendix

Appendix A

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Source: https://www.statista.com/statistics/272707/ranking-of-top-10-mining-companies-based-on-revenue/

Appendix B

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Average growth rate past 5 years = [2.27%+2.65%+2.47%+2.62%+2.16%]/5 = 2.434%

Source: https://www.statista.com/statistics/263602/gross-domestic-product-gdp-growth-rate-in-australia/

Appendix C

Guideline companies

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Appendix D

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Sources referenced

Ajay Lala et.al. (2015). Productivity in mining operations: Reversing the downward trend. Retrieved from https://www.mckinsey.com/industries/metals-and-mining/our-insights/productivity-in-mining-operations-reversing-the-downward-trend

BMI Research (2018). BMI Industry View – Iron Ore: Maintaining Our View For Prices To Unwind In 2018. Retrieved from BMI Research

BMI Research (2018). BMI View- Copper: Trade Uncertainty To Increase Volatility, But Uptrend Intact. Retrieved from BMI Research

BMI Research (2018). BMI Industry View – Global O & G Sector: Recovery In Full Swing. Retrieved from BMI Research

BMI Research (2018). Industry Forecast – Coal: Declining Prices To Limit Growth. Retrieved from BMI Research

BMI Research (2018). Industry Trend Analysis – Iron Ore: Growth Slowdown Over The Next Decade . Retrieved from BMI Research

Cecilia Jamasmie (2017). Chile’s Escondida workers on strike to protest layoffs. Retrieved from http://www.mining.com/chiles-escondida-workers-strike-protest-layoffs/

Jessica Resnick-Ault (2018). BHP process to unload US shale operations could take till 2019. Retrieved from https://www.reuters.com/article/us-bhp-billiton-ltd-deals-shale/bhp-process-to-unload-u-s-shale-operations-could-take-until-2019-idUSKCN1J00EB

Kiel Porter et.al. (2018). BHP gets bid valuing shale unit at up to US$9 billion. Retrieved from https://www.bloomberg.com/news/articles/2018-06-05/bhp-is-said-to-get-bids-valuing-shale-unit-at-up-to-9-billion

Manolo Serapio Jr (2017). With Australia’s supply disrupted by Cyclone Debbie, coal buyers race elsewhere. Retrieved from https://www.smh.com.au/business/companies/with-australias-supply-disrupted-by-cyclone-debbie-coal-buyers-race-elsewhere-20170407-gvfo1f.html

Michael Birshan et.al. (2015). Is there hidden treasure in the mining industry? Retrieved from https://www.mckinsey.com/industries/metals-and-mining/our-insights/is-there-hidden-treasure-in-the-mining-industry

Neil Hume (2018). Copper rises above $7,000 a tonne on Escondida strike fears. Retrieved from https://www.ft.com/content/c4ff3f84-68ca-11e8-b6eb-4acfcfb08c11

Siv Padhy (2017). 10 Top copper-producing companies. Retrieved from https://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/top-10-copper-producing-companies-2/

Sieni Kimalainen (2017). 11 Biggest iron ore producers in the world in 2017. Retrieved from https://www.insidermonkey.com/blog/11-biggest-iron-ore-producers-in-the-world-in-2017-614332/?singlepage=1

Technavio (2018). Top 5 largest coal mining companies in the world. Retrieved from https://www.technavio.com/blog/top-5-largest-coal-mining-companies

  1. All factual statements not referenced are sourced by BHP Annual Report FY2017 or Quarterly Reports sourced in FY2018
  2. Refer to “DCF Analysis
  3. Appendix A
  4. https://www.technavio.com/blog/top-5-largest-coal-mining-companies
  5. https://www.insidermonkey.com/blog/11-biggest-iron-ore-producers-in-the-world-in-2017-614332/?singlepage=1
  6. https://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/top-10-copper-producing-companies-2/
  7. Industry averages taken here are found in Appendix C
  8. A charge is an agreement where an asset may be appropriated to the discharge of a debt
  9. https://www.researchpool.com/download/?report_id=1537315&show_pdf_data=true
  10. https://www.bloomberg.com/news/articles/2018-06-05/bhp-is-said-to-get-bids-valuing-shale-unit-at-up-to-9-billion
  11. Author’s calculation, based on FY2017 production rates
  12. https://www.reuters.com/article/us-bhp-billiton-ltd-deals-shale/bhp-process-to-unload-u-s-shale-operations-could-take-until-2019-idUSKCN1J00EB
  13. Some of the figures below are based on Author’s calculations
  14. https://www.ft.com/content/c4ff3f84-68ca-11e8-b6eb-4acfcfb08c11
  15. http://www.mining.com/chiles-escondida-workers-strike-protest-layoffs/
  16. https://www.smh.com.au/business/companies/with-australias-supply-disrupted-by-cyclone-debbie-coal-buyers-race-elsewhere-20170407-gvfo1f.html
  17. http://australia101.com/australia/climate-in-australia/australian-cyclones/
  18. Explaination of the term “natural decline rate” can be retrieved in the link http://energyskeptic.com/2015/the-difference-between-depletion-and-decline-rate-in-oil-fields/
  19. https://www.mckinsey.com/industries/metals-and-mining/our-insights/is-there-hidden-treasure-in-the-mining-industry
  20. https://www.mckinsey.com/industries/metals-and-mining/our-insights/is-there-hidden-treasure-in-the-mining-industry
  21. Retrieved from BMI Research; Industry Trend Analysis – Iron Ore: Growth Slowdown Over The Next Decade
  22. Retrieved from BMI Research; BMI View- Copper: Trade Uncertainty To Increase Volatility, But Uptrend Intact
  23. Retrieved from BMI Research; Industry Forecast – Coal: Declining Prices To Limit Growth
  24. Retrieved from BMI Industry View – Global O & G Sector: Recovery In Full Swing
  25. https://www.mckinsey.com/industries/metals-and-mining/our-insights/is-there-hidden-treasure-in-the-mining-industry
  26. Appendix B
  27. Appendix C
  28. Appendix D
  29. Taken from BHP March 2018 Quarterly Report
  30. Note that there is an outlier point under TEV/EBIT, valuation is A$72.72

Regis Resources Ltd (ASX: RRL): Neutral pricing – Attractive dividend yield but with limited growth opportunities

Northern Star Resources (ASX: NST) – Fully priced with a Neutral Rating



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