nickel key differ between bhp : rio

Nickel key difference between BHP and Rio: analyst

From Mining News -Today

Kate Hayco?k
Monday, 5 March 2007

JP MORGAN has reported that nickel is emerging as a key differentiator between BHP Billiton and its competitor Rio Tinto for earnings forecasts in the near future, with analysts also raising the possibility that BHP's strong nickel production base alone could boost its earnings 26% by the end of fiscal 2008.


BHP is the world's third-largest producer of nickel, in contrast to Rio Tinto, which does not mine or produce nickel.

As a result, BHP has the most upside near-term earnings risk should current spot commodity price levels hold for the next year, JP Morgan analysts said.

Given nickel's current spot price of around $US20 per pound – more than double the forecast for the financial year ending in 2008 – if BHP's commodities were to hold current spot levels until the end of fiscal 2008, its earnings forecast for that year would increase 42%, of which nickel would account for 62%, JP Morgan said.

In contrast Rio Tinto's earnings for the calendar year to 2007 were forecast to increase by only by 5%.

"Apart from the fact that the annual contract priced commodities account for 60% of forecast 2007 earnings, a key reason [for the disparity] is nickel, which is absent from [Rio Tinto's] commodity suite," JP Morgan said, noting that nickel had outperformed copper and aluminium since March last year.

The company also predicted that BHP's nickel production would rise from 180 kilotonnes a year in 2006, to 187kt for this financial year, and over 210kt by 2010.

"BHP's nickel production and its lower proportional earnings from annual contract priced commodities give it significantly higher potential for large earnings upgrades," JP Morgan said.

However, analysts from the company also reported that the market did not seem to recognise the importance of nickel to BHP, and that charting BHP's share price against its key commodities showed that the market has overlooked that nickel is BHP's main driver of earnings upside potential.

The market could either be ignoring nickel's capacity to remain at strong spot levels, or had not credited the nickel side of BHP's business with due importance.

Both the massive miners retained an Overweight recommendation, with 12 month share price forecasts for Rio Tinto at $105 and $35 for BHP. The main risk to both would be lower than forecast commodity prices thanks to a global economic slowdown.

In late afternoon trading, BHP's share price was at $26.41, down 71c or 2.6%, while Rio Tinto's was also down 2.6% or $2.06 at $73.40.