abn amroTrading Update: BHP Billiton – The Big Australian is not...

abn amro

Trading Update: BHP Billiton – The Big Australian is not immune
BHP’s quarterly production was largely inline with market expectations and contained very few surprises. We see this as largely positive especially for iron ore, coal and manganese. While BHP is well placed to weather the economic downturn and in a strong position financially to make acquisitions, the stock has seen some downgrades due to the closure of Ravensthorpe and Yabulu processing. What the quarterly does highlight is that BHP is not immune from the slowdown. ABN AMRO research has downgraded BHP target price to $31.51 from $36.12 and maintains 12 month buy recommendation. Action yesterday and a report out from UBS earlier in the week suggests the market is seeing some switching out of BHP and into RIO due to the relative performances. We would be happy to go long BHP in the mid $20’s and take profits above $30 through BHP.







Production trending lower
Lower production at Escondida, reduced iron ore and met coal shipments and lower manganese output were all well flagged and expected. Further cuts were made official with 2H09 met coal production to be down 10-15% on current capacity, Ravensthorpe suspended, and Pinto Valley placed on care and maintenance.



Provisional pricing, forward sales and nickel costs impact earnings
Provisional pricing was particularly unfavourable for BHP over the half and will reduce earnings by US$1,297m. In addition, negative impacts from forward sales at Escondida have lowered earnings by US$333m, while start up costs at Ravensthorpe and the Yabulu extension will lower earnings by US$233m. Additional impairment
charges at Ravensthorpe (US$2,100m previously disclosed) are US$1,200m in 1H09 and US$400m in 2H09.



Uncertain near-term outlook
BHP is highly leveraged to the health of the global economy, where the outlook remains uncertain. ABN AMRO maintain Buy recommendation on a 12-month view, but note that uncertainty regarding bulk pricing is likely to weigh on the stock near term.