BHP vs. Rio Tinto

8/2/2019 BHP vs. Rio Tinto

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BHP BillitonFinancial Analysis as of March 14th 2012



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Agenda

1) Recommendation2) Overview3)

Strategy4) Risks5) Financial Analysis –

Ratios6) Financial Analysis – Four

Slices7)

Valuation



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Recommendation• Buy!

• 2011 Group Market Cap: US $234B

•

Group Segment DCF Valuation: US$236B

• CUVI: US $2.9B

• GOV: US $174B



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Overview•

BHP Billiton comprises two entities:• BHP Billiton Limited• BHP Billiton Plc.

• 100 mining sites in 25 countries.• Headquartered in Melbourne, Australia• Employs over 100,000 people including

contractors.• 10 Operating Segments:

• Iron ore, Petroleum, Uranium, Aluminum• metallurgical and energy coal• base metals, nickel, manganese• diamonds and specialty products



Click to edit Master subtitle style

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BHP Billiton Overview



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Key Dates• 2001 Australian Broken Hill Proprietary (BHP) merges with

the UK’s Billiton. Billiton CEO becomes Group CEO, butresigns 6 months later

• 2003 The company begins a $5 billion investment in oilextraction

• 2005 R&D Alliance with Chinese Academy of Science (CAS)

• 2008 BHP Billiton attempts to buy Rio Tinto. Board Rejects

• 2009 BHP and Rio Tinto form 50:50 Joint Venture in Australia(Iron Ore)

• 2011 Acquisition of Chesapeake Energy Corporation’s USA



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Mining and ExtractionIndustry Observations

• Sensitive to Commodity prices

• Sensitive to taxation such as

Australian MRRT: Minerals ResourceRent Tax (From July 2012) and Carbonpricing

•

Capital Expenditure HighConsolidation

• Technology Increasing Extraction

Potential




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Strategy



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People• Group CEO Marius Kloppers

• Employees: 100,000 Including

Contractors• 2010: Net Profit per employee:

$130,000



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Elements of BHP’s Strategy

• Unprecedented Demand growth dueto Industrialization and Urbanizationof Developing World

• Geographic and IndustryDiversification

•

Largest source of Profits from IronOre and Petroleum



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Elements of BHP’s Strategy

• Heavily investment in Iron Ore and LNGproduction.

•

Gained technical expertise in oil drillingfrom recent Acquisition of Petrohawk($12.1 B Cash)

•

Similar Drilling Procedure for gas andoil. Drill for gas near oil deposits – Win-Win



3/18/12 Source: BHP Investor Presentation,

Feb. 2012

Geographic & IndustryDiversification

http://www.bhpbilliton.com/home/investors/Documents/Debt%20Investors/Debt%20Investor%20Presentation%2001%20March%202012.pdf




3/18/12 Source: BHP Investor Presentation,

Feb. 2012

EBIT, EBIT Margin





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Sources and Uses of Cash

Source: BHP Investor Presentation,

Feb. 2012





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Risk Analysis: SWOT• Strengths

– Balance Sheet and Cash Position

–

Centralized Marketing Engine

• Weaknesses – High Copper Extraction Costs

– Low Margin on Aluminum

• Opportunities – Demand growth due to Urbanization and




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Competitor

Analysis:Rio Tinto



3/18/12 Source: Rio Tinto Investor Presentation, Sep. 2011

http://www.riotinto.com/documents/Media-Speeches/RioTintoInvestorSeminar_20Sept11.pdf




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Copper Extraction CostAdvantage

Source: Rio Tinto Investor Presentation, Sep. 2011





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Rio Tinto’s People• Chairman Jan du Plessis

• Group CEO Tom Albanese: No Bonusthis year

• Group CFO Guy Elliot

• Copper CEO Andrew Harding

• Energy CEO Doug Ritchie

• Employees: Fewer than BHP Billiton(77,000)

•



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Elements of Rio Tinto’sStrategy

• Geographic and IndustryDiversification

• Largest Market Share Growth: CokingCoal

• Copper is second profit source afterIron Ore

• Striving for lowest cost base forAluminum

•

2011 Net Profit reduced by Aluminum



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Rio Tinto’s Market Share

Source: Rio Tinto Investor Presentation, Sep. 2011





3/18/12 Source: Rio Tinto Investor Presentation,

Fi i l A l i






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Financial Analysis



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Rio Tinto

0

2

4

6

8

10

12

Units: Millions USD



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BHP Billiton

0

2

4

6

8

10

12

Units: Millions USD



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Segment

Performance

C dit P i



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Commodity Price

Risk• High for input costs

• Relatively low for outputs

•

Geographical Diversificationmitigates this



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Exchange Risk

• 2011 Year on Year Change: $0.22, 3% of profit

• Transactional exposure of non-functional currencyexpenditure and revenues - Not disclosed

Source: BHP 2011 AR

http://www.bhpbilliton.com/home/investors/reports/Documents/2011/2011AnnualReport.pdf




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Liquidity risk

• US$14.2 billion due next year

• Cash and cash equivalents US$10 billion, unused facilityUS$4.06 billion. BHP has enough money to pay withouttaking into account other assets (receivables etc.).












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Credit Risk• Managed by maintaining procedures converting the application for

credit approvals, granting and renewal of counterparty limits anddaily monitoring of exposures against these limits.

• No significant concentration.

• Balance of allowance account for impairment - 2% of gross amount

•

Past-due but not impaired receivables - 6% of gross amount- mostless than 30 days

• But other information such as counterparties ratings and

geographical analysis not disclosed (unknowns!).

B siness Segment























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Business Segment

Analysis

scoun e as ow








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scoun e as owValuation

Based on segments• Free cash flow= EBIT * (1-tax rate) + D&A – changes inworking capital – capital expenditure

• We have disclosure of segment D&A and capital expenditurebut not changes in working capital

• Assumptions: Group changes in working capital weighted bysegment assets

• Discount rate (WACC): 11%

• Conservative assumptions: 0% growth rate for the next five

years and 2% for terminal value)

• Valuation: US $236 Billion

PP&E

























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PP&E

Investment

Four Slices








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Four Slices

Summary

Four Slices Valuation








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Four Slices Valuation –

Buy!

0

2

4

6

8

10

12
















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Thank You








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Appendix SectionSelected Strategic Data

BHP Market









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BHP Market

CapitalizationSource: BHP Investor Presentation, Feb. 2012










3/18/12 Source: BHP Investor Presentation, Feb. 2012
















Btoe= Billion Ton of Oil Equivalent, Mtoe=Million Ton of OilEquivalent





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Rio Tinto’s Global

Operations








3/18/12 Source: Rio Tinto Investor Website (2012)

http://www.riotinto.com/ourapproach/17215_employees_17351.asp













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Appendix Section

Selected Financial Data

Non current Assets



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Non-current Assets

by Location

2011 Summary



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2011 Summary

Calculation

2010 Summary



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2010 Summary

Calculation

2009 Summary



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2009 Summary

Calculation



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CUVI Calculation



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GOV Calculation



References1. ^ "BHP chief in shock resignation". CNN. 5 January 2003.

http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP..

2. www.exchangerates.org.uk Financial Risk Section

3. http://www.miningmagazine.com/panorama/rio-and-bhp-join-iron-ore-2009 Western Australia Iron Ore 50:50 Joint Venture

http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP.biz/index.html

http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP.biz/index.html.%20Retrieved%2013%20July%202007

http://www.exchangerates.org.uk/

http://www.miningmagazine.com/panorama/rio-and-bhp-join-iron-ore-forces




http://www.exchangerates.org.uk/

http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP.biz/index.html.%20Retrieved%2013%20July%202007

http://edition.cnn.com/2003/BUSINESS/asia/01/05/australia.BHP.biz/index.html

http://en.wikipedia.org/wiki/BHP_Billiton