BHP vs. Rio Tinto
Transcript of BHP vs. Rio Tinto
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BHP BillitonFinancial Analysis as of March 14th 2012
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Agenda
1) Recommendation2) Overview3)
Strategy4) Risks5) Financial Analysis –
Ratios6) Financial Analysis – Four
Slices7)
Valuation
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Recommendation• Buy!
• 2011 Group Market Cap: US $234B
•
Group Segment DCF Valuation: US$236B
• CUVI: US $2.9B
• GOV: US $174B
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Overview•
BHP Billiton comprises two entities:• BHP Billiton Limited• BHP Billiton Plc.
• 100 mining sites in 25 countries.• Headquartered in Melbourne, Australia• Employs over 100,000 people including
contractors.• 10 Operating Segments:
• Iron ore, Petroleum, Uranium, Aluminum• metallurgical and energy coal• base metals, nickel, manganese• diamonds and specialty products
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BHP Billiton Overview
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Key Dates• 2001 Australian Broken Hill Proprietary (BHP) merges with
the UK’s Billiton. Billiton CEO becomes Group CEO, butresigns 6 months later
• 2003 The company begins a $5 billion investment in oilextraction
• 2005 R&D Alliance with Chinese Academy of Science (CAS)
• 2008 BHP Billiton attempts to buy Rio Tinto. Board Rejects
• 2009 BHP and Rio Tinto form 50:50 Joint Venture in Australia(Iron Ore)
• 2011 Acquisition of Chesapeake Energy Corporation’s USA
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Mining and ExtractionIndustry Observations
• Sensitive to Commodity prices
• Sensitive to taxation such as
Australian MRRT: Minerals ResourceRent Tax (From July 2012) and Carbonpricing
•
Capital Expenditure HighConsolidation
• Technology Increasing Extraction
Potential
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Strategy
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People• Group CEO Marius Kloppers
• Employees: 100,000 Including
Contractors• 2010: Net Profit per employee:
$130,000
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Elements of BHP’s Strategy
• Unprecedented Demand growth dueto Industrialization and Urbanizationof Developing World
• Geographic and IndustryDiversification
•
Largest source of Profits from IronOre and Petroleum
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Elements of BHP’s Strategy
• Heavily investment in Iron Ore and LNGproduction.
•
Gained technical expertise in oil drillingfrom recent Acquisition of Petrohawk($12.1 B Cash)
•
Similar Drilling Procedure for gas andoil. Drill for gas near oil deposits – Win-Win
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3/18/12 Source: BHP Investor Presentation,
Feb. 2012
Geographic & IndustryDiversification
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3/18/12 Source: BHP Investor Presentation,
Feb. 2012
EBIT, EBIT Margin
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Sources and Uses of Cash
Source: BHP Investor Presentation,
Feb. 2012
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Risk Analysis: SWOT• Strengths
– Balance Sheet and Cash Position
–
Centralized Marketing Engine
• Weaknesses – High Copper Extraction Costs
– Low Margin on Aluminum
• Opportunities – Demand growth due to Urbanization and
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Competitor
Analysis:Rio Tinto
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3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011
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Copper Extraction CostAdvantage
Source: Rio Tinto Investor Presentation, Sep. 2011
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Rio Tinto’s People• Chairman Jan du Plessis
• Group CEO Tom Albanese: No Bonusthis year
• Group CFO Guy Elliot
• Copper CEO Andrew Harding
• Energy CEO Doug Ritchie
• Employees: Fewer than BHP Billiton(77,000)
•
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Elements of Rio Tinto’sStrategy
• Geographic and IndustryDiversification
• Largest Market Share Growth: CokingCoal
• Copper is second profit source afterIron Ore
• Striving for lowest cost base forAluminum
•
2011 Net Profit reduced by Aluminum
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Rio Tinto’s Market Share
Source: Rio Tinto Investor Presentation, Sep. 2011
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3/18/12 Source: Rio Tinto Investor Presentation,
Fi i l A l i
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Financial Analysis
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Rio Tinto
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Units: Millions USD
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BHP Billiton
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Units: Millions USD
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Segment
Performance
C dit P i
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Commodity Price
Risk• High for input costs
• Relatively low for outputs
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Geographical Diversificationmitigates this
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Exchange Risk
• 2011 Year on Year Change: $0.22, 3% of profit
• Transactional exposure of non-functional currencyexpenditure and revenues - Not disclosed
Source: BHP 2011 AR
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Liquidity risk
• US$14.2 billion due next year
• Cash and cash equivalents US$10 billion, unused facilityUS$4.06 billion. BHP has enough money to pay withouttaking into account other assets (receivables etc.).
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Credit Risk• Managed by maintaining procedures converting the application for
credit approvals, granting and renewal of counterparty limits anddaily monitoring of exposures against these limits.
• No significant concentration.
• Balance of allowance account for impairment - 2% of gross amount
•
Past-due but not impaired receivables - 6% of gross amount- mostless than 30 days
• But other information such as counterparties ratings and
geographical analysis not disclosed (unknowns!).
B siness Segment
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Business Segment
Analysis
scoun e as ow
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scoun e as owValuation
Based on segments• Free cash flow= EBIT * (1-tax rate) + D&A – changes inworking capital – capital expenditure
• We have disclosure of segment D&A and capital expenditurebut not changes in working capital
• Assumptions: Group changes in working capital weighted bysegment assets
• Discount rate (WACC): 11%
• Conservative assumptions: 0% growth rate for the next five
years and 2% for terminal value)
• Valuation: US $236 Billion
PP&E
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PP&E
Investment
Four Slices
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Four Slices
Summary
Four Slices Valuation
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Four Slices Valuation –
Buy!
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Thank You
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Appendix SectionSelected Strategic Data
BHP Market
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BHP Market
CapitalizationSource: BHP Investor Presentation, Feb. 2012
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3/18/12 Source: BHP Investor Presentation, Feb. 2012
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3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011
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3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011
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3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011
Btoe= Billion Ton of Oil Equivalent, Mtoe=Million Ton of OilEquivalent
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Rio Tinto’s Global
Operations
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3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011
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3/18/12 Source: Rio Tinto Investor Website (2012)
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3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011
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Appendix Section
Selected Financial Data
Non current Assets
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Non-current Assets
by Location
2011 Summary
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2011 Summary
Calculation
2010 Summary
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2010 Summary
Calculation
2009 Summary
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2009 Summary
Calculation
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CUVI Calculation
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GOV Calculation
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References1. ^ "BHP chief in shock resignation". CNN. 5 January 2003.
http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP..
2. www.exchangerates.org.uk Financial Risk Section
3. http://www.miningmagazine.com/panorama/rio-and-bhp-join-iron-ore-2009 Western Australia Iron Ore 50:50 Joint Venture