Replies to post #210 on The Rising Influence of Rising Affluence

[DewDiligence]

Not Much to Dig About BHP Shares

[This piece from Barron’s is unduly bearish, IMO. BHP is not exactly a cheap stock, but it’s the premiere diversified natural-resources company in the world and that ought to justify some premium relative to run-of-the-mill mining companies just as XOM warrants a premium in the energy sector. Moreover, if one trades out of BHP now based n valuation, when does one get back in to participate in the demographic tailwind that will generate a rising global demand for basic materials? (See #board-15787 for more on this topic.)]

http://online.barrons.com/article/SB124874823523185837.html

›Shares of the high-flying diversified mining company await their moment of reckoning

July 28, 2009
By NAUREEN S. MALIK

For investors, BHP Billiton , the world's largest diversified miner, has been something of a knight in shining armor, widely outperforming the markets in recent months.

The American depositary receipts (ticker: BHP) have rallied 150% since last November's lows to close at $61.63 Tuesday. [BHP closed at $62.96 on Friday 7/31/09.] The entire metals mining group is up, but these ADRs have outperformed leading peers, spurred on by a strong balance sheet and profitability.

But the knight has one major chink in its armor: outsized expectations.

BHP and metal stocks have gained ground due to sheer relief that they have not collapsed under economic pressure. China's stockpiling of cheaper commodities following last year's collapse also fueled a rebound.

Now investors' expectations have gotten ahead of the stock. BHP's U.S.-listed hares are trading at 24 times 2009 and 2010 earnings estimates of $2.59 and $2.54, respectively.

Satish Betadpur, director of research at Independent International Investment Research, says there are signs of economic recovery, "but I don't think enough of it is there for these stocks to triple or double."

This scenario has negative implications for other materials stocks, which closely track each other.

BHP Billiton Ltd. could fall back to $39 a share, says Betadpur, who has a Sell rating for the ADRs as well as the listings in Australia and the United Kingdom.

BHP Billiton is the result of a 2001 merger between Australia's BHP Ltd. (now BHP Billiton Ltd.) and the U.K.'s Billiton PLC (now BHP Billiton PLC with the ticker BBL). The latter is valued at 19 times earnings estimates. They exist as separately traded entities but have unified operations and management. [BHP is a “dual listed” company, which means it has two parent companies; although each parent company has it own BoD, the two BoD’s operate as though they were one, ensuring that investors in each company receive the same dividends and liquidation rights. In the case of BHP Billinton, the ADR’s with the BHP symbol have a richer valuation than the ADR’s with the BBL symbol because they are considerably more liquid.]

The broad enthusiasm behind BHP's shares stands in sharp contrast to the company's own cautious stance.

Earlier this year, Marius Kloppers, chief executive officer of BHP, said that "weakness, uncertainty and volatility in the outlook exist not only in the short term, but also in the medium term.

"Demand for our products is being impacted globally," he said.

In fiscal 2008, BHP generated $459.5 billion in revenues and 18.2 billion of net operating cash flow.

Metals -- such as copper, zinc, silver, lead, uranium and gold -- generated 25% of its sales and 40% of its profits. Iron ore generated 16% of revenues and 24% of profits.

The company's oil-and-gas business, which would rank about 25th among the publicly trade entities based on daily production volume, made up 15% of sales and 28% of profits. The rest came from coal, aluminum, manganese, diamonds and other materials.

BHP faces considerable global economic headwinds. "I don't think we are going to get back to the type of growth we saw in past years," says Kirk Brown, senior portfolio manager of the American Beacon International Equity.

He likens the recent rebound in material stocks to a "rubber band stretching."

A great deal of hope is being pinned on stimulus packages stretching from the U.S. to Europe to China, but it will take time for the monies to be doled out.

China has recently been buying up metals, energy and other commodities. But rather than signifying a bounce in demand for industrial activity, China appears to be stockpiling cheap commodities as a way to diversify its assets after investing heavily in U.S. Treasuries, says Betadpur. [Maybe.]

"I get the feeling that a crisis has been avoided in China," says Ron Holt, chief executive officer at Hansberger Global Investors.

Still, a recovery in China wouldn't be enough to drive a sustainable turnaround on its own. The country [China] represents 30%-35% of absolute global demand for commodities, Kloppers noted.

For instance, China, the largest consumer of iron ore, is demanding a 40% price cut from 2008's contracted price of $132 a metric ton (versus the spot market high of $200), says Betadpur.

BHP is expected to increase its iron-ore production from 111 million tons, or 7.4% of the global market, to 300 million tons by 2015.

China accounted for a fifth of the company's sales last year and Asia about 50%. Europe represented 24% with the rest of the sales coming from Australia, North America and other regions.

Betadpur expects metal prices to return to the level they were six months ago to form another bottom and from there a gradual recovery. "The wild card is how much money does China want to spend to build their inventory?"

BHP is a strong global player, but it would be prudent for investors to capture profits now and wait for a pullback before digging in again.‹

[DewDiligence]

Average Price of Seaborne Iron Ore 2005-2009



Source: WSJ