why so cheap compared to rio it , page-42

analysis of the 7 divisions FYE 30/6/05 financials (revenue in US$):

1. Carbon steel materials (iron ore & coking coal) 7330 (24% of total)

2. Petroleum and LNG 6175 (21%)

3. Aluminium 5324 (18%)

4. Base metals (copper, lead, zinc, uranium) 4609 (15%)

5. Coal (thermal) 3054 (10%)

6. Stainless steel materials (nickel & cobalt) 2712 (9%)

7. Diamonds 765 (3%)


During the six months to 31/12/05; we know that iron ore and coking coal (supplied under contract to 1/4/06) remain strong. In today's Financial Review, it is suggested that 2006 pricing for coking coal (as opposed to thermal coal) might remain firm with a rollover of pricing or a small price fall.

We know the petroleum prices have firmed but there was a supply disruption during Hurricane Katrina. Petrol and LNG prices remain strong, currently.

Aluminium price is said to have improved significantly in recent months.

Base metals (prices) have soared in the past few months.

Thermal coal pricing from 1/4/06 looks like weakening by 20% to 30% (at most). The effects on revenue, of which would be offset by the other divisions.

Nickel prices might soften a bit.

Diamonds have been rising in price in recent months due to rising demand from China and India.

Production volumes have been rising and there is a large expansion program underway. The eventual supply response by the global mining industry might dampen pricing, unless global demand also keeps rising. This hinges on global economic growth.

BHP has the advantages of being the most diversified mining corporation in the world.

At this juncture, the prospective P/E is priced for eventual tapering of demand and commodity prices. The big question is at what time in the future. If the "stronger for longer" theme goes on, re-ratings will continue periodically and the trend continues.

Global economic growth is the key variable. As such, research into what is happening across the world is important and the formulation of a view as to what is likely to happen is also helpful. Easier said than done as the world is becoming increasingly complex and economically interwoven by globalisation forces.

Conclusion: Stick to the crystal ball gazing.