shorters gettin fried big time, page-15

This is from Macquarie Equities. I hold bhp, qbe, wow , zfx, rio and sun.

19 September 2007

BHP: Why You Should be Long

Global resource stocks surged overnight after the Federal Reserve announced a 50bp cut to its key funds rate - in the UK, BHP rallied 4.1%. In recent months, spot iron-ore prices have gone through the roof (again!). In addition, copper and zinc inventories have fallen considerably over the past month, highlighting the relative tightness of metal availability in China. We are also seeing record crude oil prices, with light sweet crude hitting US$81.51 overnight. As we approach the iron-ore contract negotiation period between the Asian steel mills and producers, Macquarie Research Equities (MRE) analysts provide you with a timely reminder why BHP is an absolute stand out in an environment of strong demand for resources.


Surging Iron-Ore prices - Over the past week, Indian 63.5% iron ore prices surged by $8/t from last week, hitting $150/t. MRE are also hearing reports of Indian offers that are a further $10/t higher than these levels.


Surging Steel Prices - Chinese steel prices climbed to their highest level since the June sell-off. Hot rolled coil prices hit $493/t, up by 1.9% WoW and 9.8% MoM, and cold rolled coil reached $575/t, ex-VAT, up by 1.5% WoW and 5.7% MoM.


Warming up for the iron ore negotiations: Chinese talking more of fundamentals now - Two weeks ago, Mysteel, a Chinese steel consultancy, hosted its 2007 International Iron Ore Market Seminar- a platform for communication from “all parties of the iron ore sector. For the first time, there appears to be acceptance by the industry that it is the fundamentals that are driving prices up, not “bullying by the big three sellers.” The conference highlighted that Chinese iron ore stakeholders are more objective and pragmatic about the current iron ore supply/demand balance. After years of iron ore price increases, the Chinese parties’ discussions were more about fundamentals and less about “being bullied by the big three.”

BHP – A Standout in the Big End of Town
Committed to growth. With Marius Kloppers at the helm, MRE reiterate BHP’s commitment to growth - optimising large, low cost, expandable assets that are diverse in both geography and commodity. The strong earnings and cash flow growth that is expected to follow will, in turn, facilitate future growth via the reinvestment of excess funds in world class development opportunities.

Unparalleled investment opportunities. BHP have an unparalleled growth pipeline that includes 19 projects and ~US$14bn of approved investment, 14 projects and ~US$7bn of investment at the feasibility stage, and a phenomenal US$50bn of investment at the conceptual level.

Raising the bar. MRE are very positive about the outlook for metals demand with the key markets of China and India deemed to be in good shape.

Set for an even better FY08. Positive operating performance, the delivery of high class growth and a supportive demand thematic, leave MRE optimistic that strong EPS growth (ie ~20%) can again be delivered through FY08 as the ongoing buyback programme enhances what is already a compelling outlook