Extracted from Huntley's best business performers for 2006 written in November... I totally agree with the very last few sentences suggesting that in early 2006 price appreciation could come from higher iron ore contracts negotiated:
BHP is a well managed global resource leader with a balanced portfolio of quality world class, long life assets and increasing pricing power in bulk commodities. Many of the prime assets are well located to service Asia, China in particular. Maintenance of a low cost operating position and a strong capital structure are key to the growth strategy. The company has over 100 assets in 20 countries on six continents. Over two thirds of BHP's turnover is generated in the relative safe havens of Australia/NZ, North America and Europe. Production covers major commodity groupings including petroleum, alumina, copper, gold, iron ore, metallurgical coal, energy coal, nickel, and diamonds. Diversification lends comfort from a sovereign and commodity risk perspective. BHP represents a foundation resource investment for any conservatively managed portfolio. BHP is clearly one of the best value resource exposures on a risk/reward basis - trading on a prospective sub 10 PE for FY06 and FY07, albeit at a modest 2% yield, a function of the progressive dividend policy. Progressive is a nice way of saying the payout ratio will be low to guarantee that the dividend will rise each year. The company generated record FY05 sales, EBITDA, EBIT and NPAT despite the WMC acquisition only contributing a modest one month's earnings. Some cost pressures have arisen with higher fuel, labour and raw material costs. A natural hedge against fuel costs exists in BHP's thermal coal and oil and gas assets, plus the acquisition of the Olympic Dam copper and uranium operations from WMC, positioning it to participate in the increase in demand for energy around the world. Olympic Dam gives BHP access to around one third of the world's economically recoverable uranium resources supplying 8.0% of the world market. Nuclear power capacity world-wide is increasing steadily with over 30 reactors under construction in 11 countries. BHP expects the gap between primary supply and demand for uranium to persist for many years. With more cautious overtones, BHP anticipates emerging economies to remain buoyant, offsetting slowing growth in the OECD nations and resulting in continued above trend global economic growth this year. Optimism remains about the growth prospects for China, India and Russia. This is expected to underpin commodity demand in the near term. Regardless of prices, the strategy is to build a diversified geographic and product platform to enable the company to deliver sustainable value no matter what the economic conditions and at any stage of the cycle. BHP has US$10.6bn of projects approved for development the bulk of which are on schedule for completion before the end of 2007. Some budgets, particularly for nickel projects, have increased by around 30%. Approval for Rapid Growth Three will increase capacity at Area C iron ore mine in WA by 20Mtpa to 42Mtpa, part of the blueprint to grow Pilbara output to 152Mtpa by early next decade. Confirmation of an iron ore price rollover or better early next year could satisfy the market that earnings strength may be more than just temporary. If this step shift in psychology occurs, BHP's PEs may climb nearer to market averages through share price appreciation.
I disclose that I hold a long CFD on BHP!
BHP Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)