Weaker third quarter for BHP
Weaker than anticipated quarterly volumes at BHP Billiton are offset by analyst upgrades to near-term price forecasts
Bright spots included nickel and diamonds where volumes rose a higher-than-anticipated 8% and 60%, respectively. Nickel stockpile draw-downs offset weather constrained Yabulu and Western Australia operations. Higher throughput and grades boosted diamond output at Ekati in Canada. Iron ore volumes rose modestly and copper was steady, both in line with forecasts. BHP sold deferred iron ore contract tonnages into the spot market. Copper could improve in first-quarter fiscal 2010 upon rectification of mill problems at Escondida. Petroleum output declined 5% to 31.7 million barrels of oil equivalent, this largely due to gas. The cause was not seasonal but bad weather both in the Gulf of Mexico and Western Australia, and a damaged pipeline in Bass Strait. Output compared with the previous corresponding period also fell, down 3%.
The impact of weaker than anticipated quarterly volumes on earnings and valuation is offset by upgrades to some near-term price forecasts. We softened the severity of the assumed iron ore price decline from 50% to 40% for the 2009 Japanese fiscal year beginning April 1. Copper price has been notably stronger with London Metal Exchange stockpiles falling for the first time in some considerable months on Chinese buying. Between them, iron ore and copper accounted for around 60% of BHP's $24.3 billion fiscal year 2008 earnings before interest and tax. BHP is favourably leveraged when on the right side of price moves for these commodities. Our valuation is little changed.
We retain our positive stance on BHP. It is not immune to the global economic downturn but world-class, low-cost assets, enviable balance sheet strength, and low sovereign risk should see it leap further ahead of lesser rivals who are debt moribund and cash constrained. In the shorter term gains could be relative, but in the longer term they should be absolute. At the current share price, BHP is on undemanding earnings multiples.
Marl Taylor is a stock analyst for Morningstar.com.