PERTH – The world’s biggest mining house, BHP Billiton [ASX:BHP], is in a similar boat to its global diversified resources rival, Rio Tinto [ASX:RIO]. Both have booming iron ore businesses, but appreciating currencies versus the US dollar are expected to puncture their profits. In fact, according to leading analysts, BHPB’s earnings are the most sensitive to currency movements relative to those of its peers. The anticipated adverse impact of a stronger Aussie dollar and South African rand will be neutralised to some degree by BHPB’s record annual iron ore shipments (of 80 million tonnes) to Asia, which it announced today (Thursday).
In addition, unlike Rio (a bigger iron ore exporter with annual shipments of more than 100Mt), BHPB has a petroleum arm – a substantial business that has assumed the mantle of BHPB’s leading EBIT generator (see related article in side bar). Crude oil prices remained robust in the June quarter, which should, along with strong contributions from iron ore and coking coal (part of its carbon steel materials division), help soften the currency-related blow. Its iron ore EBIT should benefit from swelling Chinese imports and the nine percent higher contract prices (since 1 April) for iron ore supply to the key Japanese steel market. However, aside from currency, “other potential factors in depressing earnings include generally benign demand for many commodities, higher energy costs, higher demurrage and transportation costs, and high inflation in South Africa,” cautioned ABN Amro analyst, David Bird.
BHPB’s profit sensitivity data shows that a US$0.01 shift in the value of the Aussie dollar and a 0.2 rand movement against the US dollar affects its annualised bottom line by US$40 million and US$35 million respectively. The rand strengthened 13 percent against the US dollar (from 8.55 to 7.47) in the second half of the 2002/03 financial year (FY) and a whopping 27 percent (from 10.26 to 7.47) for the full FY, while the Aussie dollar climbed 20 percent (from US$0.56 to US$0.67) in the second half and the same over the whole FY.
In light of BHPB and Rio’s increased popularity on the bourse this month, London-based Bird argued the market may not be fully pricing in the major influence of currencies in shaping the miners’ returns. “A 10 percent fall in the US dollar removes nine, 11 and 17 percent from Rio, Anglo American and BHPB’s net profit respectively,” his research indicates. “For BHPB, which uniquely … takes changes in the US dollar value of rand debt into the P&L, the currency impact on non-monetary assets and liabilities accounts for just over half of that sensitivity.”
Both Bird and JB Were’s Neil Goodwill felt BHPB and Rio’s shares were trading at significant premiums to valuations at the moment. “Momentum is driving both … higher after a period of considerable underperformance and we believe it prudent to take a more neutral stance,” said Goodwill. “From a fundamental perspective (and on current projected commodity prices and currency) we would consider both stocks to be expensive.” The upbeat sentiment may in part be fuelled by the recent retracement in the Aussie dollar which has eased about US$0.02 and up to US$0.04-plus (from highs of over US$0.68) this month alone. But the Melbourne-based analyst did point out that the currently more positive investment mood – being driven by a number of factors including an improved global economic recovery outlook and warm fuzzies about the prospects of sustained Chinese growth in the medium-to-long term and its potential impact on commodity prices – should provide continued share price support.
The multinational will report its FY earnings results next month. Few analysts were likely to again downgrade their BHPB forecasts (the consensus of which ABN Amro says has fallen about 18.5 and 13.5 percent for the FY just gone and the current one) following the group’s strong June quarter production performance. Bird is forecasting net income figures of US$1.9 billion and US$2.1 billion for 2002/03 and 2003/04, while Goodwill is estimating US$1.75 billion and US$2.2 billion and JP Morgan analyst Richard Rossiter US$1.7 billion and US$2.3 billion respectively.
BHPB’s share of production for the June quarter from some of its core units were 30 million barrels of oil equivalent (up seven percent compared with the March quarter), 1.06 million tonnes of alumina (up six percent), 273,000 tonnes of aluminium (up two percent), 19.42Mt of iron ore (up 13 percent), 9.02Mt of coking coal (up five percent), 21.99Mt of energy coal (up 11 percent), 1.3 million carats of diamonds (up 28 percent), 229,200t of copper (down one percent) and 21,000t of nickel (up 13 percent).
Its shares shot up A$0.20 or 2.1 percent today to a six-month high of A$9.65.
RIO Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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