Huntleys' Stock of the Week

Recommendations: Buy

BHP's current stock prices

Weaker Than Expected 3Q09

Investment Rating:

BHP is a well managed global resource leader with a balanced portfolio of world class, long life assets, and a full suite of conventional energy products. The world's largest diversified resources company has many prime assets well located to service Asia. Low cost operations and a strong balance sheet are key. Most revenue comes from the relative safe havens of Australia/NZ, North America and Europe. Production covers major commodities including petroleum, alumina, copper, gold, iron ore, coking coal, energy coal, nickel, and diamonds. Diversification lends comfort from a sovereign and commodity risk perspective. BHP is a foundation resource investment for conservative portfolios.

Event:

• It came as no surprise that 3Q09 sales volumes declined for most product categories, but the quantum was higher than anticipated for aluminium, 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. Compared to 2Q09 alumina output fell 13% and aluminium 21%. 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.

Impact:

• The impact of weaker than anticipated quarterly volumes on earnings and valuation is offset by upgrades to some near term price forecasts, and the roll forward in our NPV model to the next quarter. 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 LME 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 US$24.3bn FY08 EBIT. BHP is favourably leveraged when on the right side of price moves for these commodities. Our valuation is little changed at $41.00ps. So too our FY09 earnings forecast at 276cps given three quarters of the year is already accounted for. Our FY10 earnings forecast more fully benefits from the price upgrades, increasing by 6% to 224cps.

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