copper concentrate market to remain in deficit, page-2

jbwere site visit BHP BHP - Site visit earnings/valuation changes
15/12/06 13:40 Neil Goodwill

BHP; Materials; BHP - Site visit earnings/valuation changes

Following the site visits and presentations during the week we have adjusted our earnings and valuation estimates. We had previously adjusted earnings part way through the week, reflecting marginally weaker production from Nickel than forecast. We also made a minor adjustment for the coking coal price settlement which was immaterial.

The main changes to our earnings reflect a more favourable view on Spence (copper) following its initial shipments this week - we didn't visit Spence but the marketing presentation in copper outlined BHP's copper book for CY 2007 and this together with actual first production being announced gave us confidence to lift our startup production expectations which is significant given our forecast copper prices for 2007.

On the downside we found ourselves adjusting our capex estimates upwards (Nickel) particularly in the later years in order to maintain production and the timing of expansions Olympic Dam (OD) outwards which had a negative impact on our NPV assumptions.

The site visit to OD included presentations on both the copper and uranium markets. The presentations on the current operations contained few surprises with production likely to remain in the 200-220kt/yr range with costs at US$90c/lb and rising. The expansion is likely to be up to 600kt/yr of copper after the initial ramp up before settling to 500kt/yr. If all goes well and copper and uranium prices remain very high the resource could sustain higher production rates than this.

The importance of uranium should not be underestimated. OD started its original operation more as a uranium mine than a copper mine - with relatively low uranium prices achieved over the last 2 decades, the mine effectively became a high cost copper producer with low returns. If you need to build concentrators and smelters in the copper business and then get low by-product credits, you are likely to receive low returns and OD has been in this category.

With respect to the current uranium market BHP appear to be in a fortunate position. Power stations are keen to secure supply and BHP expect this will allow them to sell 10-15 year contracts (from 2013) with "high" floor prices and uncapped upside. This is an ideal outcome as it underpins the expansion capex (~c. US$5bn) and allows the mine to be a low cost copper producer while giving the mine upside to the uranium price.

Overall the site visits highlighted the work (capex) required to stabilise (over the longer term)the ex WMR assets (nickel and OD) and the tight labour/materials market in WA. Good for extending the cycle but causes delays and increased capex assumptions.

Earnings and valuations are in US$.

EPS Revision:
FY07: -0.1% to 223.6c
FY08: +1.4% to 234.7c
FY09: +0.3% to 202.5c

Valuation: $19.00 (was $19.58)
Recommendation: S/T Outperform; L/T Buy
Share price: $26.06