Replies to post #4059 on The Rising Influence of Rising Affluence

[DewDiligence]

Asia’s Hunger for Iron Ore Boosts Rio Tinto

[I do not own RIO because I prefer BHP, VALE, and CLF, which give me enough industrial-mining exposure. If I did not own those names, I would find RIO attractive at the current price.]

http://online.barrons.com/article/SB50001424052748704895604577179021207191262.html

›JANUARY 28, 2012
By ASSIF SHAMEEN

The Australian mining titan, moving to tighten its hold on key assets, has enjoyed a 20% stock rise in a month, as analysts augur upside of 30% or more. To some, it looks like a better play than rival BHP Billiton. [Well, maybe. BHP is more diversified, however.]

For years, Oyu Tolgoi, the world's largest copper-gold-silver mine development project in Mongolia has been a bone of contention between mining entrepreneur Robert Friedland and the giant global miner Rio Tinto Group.

The Mongolian project is 66% owned by Ivanhoe Mines (ticker: IVN), founded by Friedland. The storied entrepreneur brought Rio in as a partner six years ago to help mitigate his huge risks, only to see the Australian giant boost its stake to 49%. After years of bickering, Rio and Friedland hammered out a standstill agreement, freezing Rio's interest at 49% of Ivanhoe. Last week, the agreement expired and Rio (RIO) quickly moved to increase its Ivanhoe stake to 51%, buying another 2% of the shares outstanding for $312 million. "It removes a cloud of uncertainty and is a huge plus for Rio Tinto," says David Lennox, mining-sector analyst at Fat Prophets in Sydney.

Control of Ivanhoe, and through it a tighter grip on key assets like Oyu Tolgoi, is helping Rio Tinto cement its position as one of the world's biggest miners. Insatiable appetite for raw materials like iron ore, aluminum, copper, coal, gold and uranium from China, India and other emerging markets helped drive the stock before the crisis. Last year, concerns about a slowing economy in China, recession in Europe and anemic growth in the U.S. weighed on Rio Tinto stock. "The market was pricing in the expectation of lower commodity prices," notes David Radclyffe of Nomura Securities in Sydney. "Now that there is realization that China is successfully managing a softer landing, there is no reason why resources stocks like Rio should sell at deep discounts," says Fat Prophets' Lennox. Rio stock is up a whopping 20% over the past four weeks, and analysts say it could have another 30% to 40% upside over the next 12 months.

That's a far cry from heady days of 2008 when, in the aftermath of the Lehman Brothers collapse and the advent of the financial crisis, Rio Tinto found itself with $40 billion in debt following an ill-timed $39 billion takeover of Canadian aluminum giant Alcan and a slump in demand for its commodities. As Rio reeled, vultures circled around it. A bid from Chinalco of China to invest 19 billion Australian dollars (US$20.2 billion) in Rio collapsed after Australian regulators refused to rubber-stamp the deal, and the stock plunged further.

Yet Rio hunkered down and pulled off an audacious $15 billion rights issue. From over $40 billion in debt three years ago—most of it short-term—Rio has pared its debt to just under $8 billion. Indeed, it is now yielding so much money that Credit Suisse's Paul McTaggart reckons it could be in a net cash position next year. "Rio remains our favorite mining stock because of its incredibly strong balance sheet," says Hugh Young of Aberdeen Asset Management in Singapore who sees the miner as a classic play on Asia's growth story.

Macquarie Securities mining analyst Lee Bowers likes Rio Tinto because iron ore is his preferred commodity as Chinese crude-steel capacity recovers through 2012. Macquarie estimates that crude-steel production in China could top 730 million tons this year. Unlike its larger, more diversified counterpart BHP Billiton (BHP), Rio is a much more focused bet. "Rio is more heavily exposed to iron ore, which makes up 70% of its earnings," says Lennox. "What's driving Rio's earnings and will continue to drive its earnings is not just higher commodity prices, but also higher production," he says. "If your bet is that China can continue to grow 7% for the next year or two, Rio will see higher prices and higher volumes, and that can't be bad for the stock."

Credit Suisse's McTaggart, has a Buy and 12-month price target of A$90 on Rio, more than 30% above the current level. The stock trades at just 8.4 times this year's expected earnings, versus a historical norm of 9.6 times forward earnings. The company has bought back nearly $7 billion of its stock over the past year and might produce a positive dividend surprise when the company reports its annual earnings on Feb. 9, the Credit Suisse analyst says. Nomura's Radclyffe also prefers Rio Tinto over BHP Billiton. He has an A$97 target price. Radclyffe believes that supply deficits in iron ore and copper will continue to 2014. That can only be good for stocks like Rio.‹

[DewDiligence]

BHP Reports In-Line FY1H12 Results

[BHP reported FY2Q12 and FY1H12 production volume on 1/19/12 (#msg-71091712), so the FY1H12 revenue and earnings were already known within a fairly tight range. BHP’s own PR on the FY1H12 financial results is at http://www.bhpbilliton.com/home/investors/reports/Documents/2012/120208_BHP%20Billiton%20Results%20for%20Half%20Year%20Ended%2031%20December%202011.pdf ; the CC slides are at http://www.bhpbilliton.com/home/investors/reports/Documents/2012/120208_BHPBillitonInterimResultsFY12Presentation.pdf .]

http://online.wsj.com/article/SB10001424052970204136404577209513343598028.html

›FEBRUARY 8, 2012
By ROBB M. STEWART

MELBOURNE, Australia— BHP Billiton Ltd. said its financial first-half profit fell 5.5%, the first drop in two years for the world's biggest mining company as it was hit by rising costs, production disruptions and falling commodity prices.

The Anglo-Australian company Wednesday maintained its long-held view that demand for its products will remain robust, but said price volatility was likely to persist as the European sovereign debt crisis and general weakness in manufacturing and construction across key markets weighs on sentiment.

"We have delivered a robust result...despite significant volatility," Marius Kloppers, chief executive of the Melbourne-based company, said during a conference call. "Sentiment changed from one month to another during that period."

Mr. Kloppers said BHP expects a boost in production volumes over the short- to medium-term from "enormous latent capacity," as disruptions that held back output of oil, coal and copper are overcome. Already the company is targeting another record year of iron-ore production as it continues to expand operations in Australia's remote western Pilbara region.

Net profit declined to US$9.94 billion in the six months through December from US$10.52 billion a year earlier, while revenue increased 9.7% to US$37.48 billion from US$34.17 billion, the company said. It declared an interim dividend of 55 cents a share, up from 46 cents in the same period the year before.

BHP turned in a record profit in its last financial year [i.e. FY2011 ending 6/30/11] of US$23.65 billion, the largest ever for an Australian company, driven by soaring prices for iron ore and other key commodities. However, prices for iron ore, U.S. gas and other products fell in the last months of 2011.

"BHP has delivered a solid result in light of difficult market circumstances," said Peter Esho, chief market analyst at City Index.

Earnings for the period were held back by lower production at BHP's majority-owned Escondida copper mine in Chile due to lower ore grades and strikes, as well as flooding in its Queensland coking coal operations, it said. A jump in costs for labor, contractors, equipment and other items [items that are affecting all mining companies but particularly those in Australia] dented underlying earnings by US$1.6 billion , it added.

Iron ore remains BHP's key earnings driver, as it does with other major mining companies including Rio Tinto PLC, which Wednesday said a further US$3.4 billion would be spent expanding the capacity of its operations in the Pilbara as it ramps up output. The commodity remains a key differentiator with Xstrata PLC, which Tuesday announced formally its intention to merge with key shareholder Glencore International PLC to create a US$90 billion mining and commodities trading giant [#msg-71808209].

BHP's market value will continue to eclipse the combined Glencore-Xstrata, but analysts have suggested the Anglo-Swiss rivals may use their advanced scale to chase further acquisitions and to possibly gain a foothold in commodities such as iron ore.

Mr. Kloppers said BHP's focus on a range of large-scale, low-cost commodities it can expand puts it in a different space to Glencore, which is primarily a commodities trader.

"Some people have asked me, 'does this make a difference to you?' and I would say it doesn't make a difference in our strategy, it doesn't make a difference in our philosophy," he said.

BHP has plans to invest US$80 billion in key divisions over five years, and has said it would invest some US$20 billion in its U.S. shale business, which it picked up in two large acquisitions in 2011, together worth US$17 billion. [These were the Jul 2011 acquisition of HK (#msg-65211152) and the Feb 2011 purchase of acreage from CHK (#msg-60162987).] Among other investments, billions are going into Australian iron ore and coking coal, and BHP is considering growing its Olympic dam copper, gold and uranium mine in Australia as well as developing its potash assets in Canada.

Aluminum remains a drag on earnings, swinging to an underlying loss of US$67 million from a year-earlier profit of US$17 million for the half-year, and Mr. Kloppers said the company was no longer directing capital expenditure toward the relatively small division.

Lower prices and rising power costs have hit the aluminum industry hard, prompting several companies to cut production. Mr. Kloppers, asked by an analyst if BHP also would cut capacity, said the company wouldn't run any business that doesn't generate cash and can't sell its product.

BHP late last year launched a review of its diamonds division with an eye on selling it.‹