Fair value $4.74 per share, page-41

BigLeon,

Fair Value arguments are subjective at the best of times. When you run the ruler over a stock like BHP and question a value that is any higher than 30% of its current value, it will always drawer some rather perfunctory responses.

In a nut shell you provide some reasonable workings. However when looking into Fair Valuations of juggernauts like BHP you need to take a number of other factors into consideration.

This is part of a commodity cycle. It just so happens to be the bad end of a commodity cycle. But like all commodity cycles only those with the lowest production costs, highest grades, largest supply contracts and flexibility to savagely reduce costs will survive it. Ultimately all the high costs producers will shut up shop and company's like BHP are the most likely to be there to pick up the pieces.

BHP can pretty much control the fate of the copper price and is one of the big three quality Iron Ore miners. In this instance size does matter. What value do you attribute to the value of its known resources and reserves.

If you were going to value BHP purely on its current earnings potential then I don't think your actually that far off the mark.

But if your going to put a real value on BHP then your going to have give some value to its assets. Remember apart from being some of the highest quality assets in their class, many of these assets can produce for 20+ years at extremely low cost basis.

So based on earnings - $4.74 per share is only one component of any fair value to be attributed to BHP.

But your figures do bring into perspective the serious state of affairs shareholders are potentially facing when assessing short term yields.

I still think BHP will see some real share price pressure in the short term, but I do not see it heading south of $14, unless demand simply drops off a cliff - then lets face it - the world would be in a whole lot of pain. Bulk Commodity prices will settle just as soon as a few high cost producers shut up shop and supply resolves itself.