Weaker third quarter for BHP

Weaker than anticipated quarterly volumes at BHP Billiton are offset by analyst upgrades to near-term price forecasts

Mark Taylor | 27-04-09 | E-mail Article

It came as no surprise that BHP Billiton's third-quarter fiscal 2009 sales volumes declined for most product categories, but the quantum was higher than anticipated for aluminum, coking, and thermal coal. BHP tried to put a positive spin on the numbers but in reality the backdrop is weak demand and the company admitted conditions remain uncertain in the medium term. Alumina output fell 13% and aluminium 21% compared with the second quarter 2009. A calciner outage at Worsley and scheduled maintenance at Paranam refineries crimped alumina output while lower sales from Hillside and Mozal smelters limited aluminium volumes. Coking coal dropped 9% with higher-than-anticipated curtailments due to weaker demand. Energy coal fell 14% due to wet weather in the Hunter Valley and at Douglas, Middelburg, in addition to a planned longwall move at San Juan and port maintenance for Cerrejon.

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.

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