BHP Billiton (BHP)

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BHP Billiton Limited (BHP) ASX:BHP plc:LON:PLN NYSE:BBL is the world's largest diversified resource company, with operations spanning several continents. BHP is involved in mineral exploration, production and processing, oil and gas exploration and development, steel production and merchandising. The company is a major producer of a range of commodities, most notably aluminum, base metals (copper), carbon steel materials (iron ore and coking coal), energy coal, petroleum, stainless steel materials (nickel and chrome) and diamonds (over 3 million carats, all of it coming from EKATI in Canada). The company was formed through the 2001 merger of BHP, an Australian company, and Billiton, which was operated from London with the majority of operations in South Africa. The merger was structured as a dual-listed companies (or DLC) merger. As a result, the two companies still technically exist as separate entities BHP Billiton Limited (formerly BHP) and BHP Billiton Plc (formerly Billiton) but share one board and one management team, which are headquartered in Melbourne, Australia. The pre-existing primary listings on the London and Australian stock exchanges are maintained, as are the secondary listings of BHP Billiton Plc on the Johannesburg and Paris stock exchanges. Like main competitor Rio Tinto BHP has corporate offices in both Australia and the UK (despite the fact that when they merged 58% of the new company was controlled by Australia's BHP).^[1] The company's fiscal year ends June 30, the BHP Billiton Group is listed in London and Australia as two entities sharing the same management but having distinct shareholders, BHP Billiton Limited (current article) appoint more of the higher management and board of directors while British based BHP Billiton plc has strong minority control of the company.

Contents 1 Business and Financials 2 Business Overview 2.1 Production 2.2 olympic dam deposit equals Australia's gdp (2011) 2.3 Shareholders (June 2010) 3 Trends and Forces 3.1 Canadian Potash 3.2 Possible Merger with Rio Tinto 4 Competition 5 References

Largest domestic and international competitor Rio Tinto (US$ 41.825 billion in revenue in 2010 compared to US$52.798 billion for BHP) combined iron ore operations in Western Australia with BHP's (to be completed in the second half of 2010); The deal saves the companies US$10 billion in costs. The joint venture deal comes just after BHP attempted a hostile takeover of Rio Tinto during the economic crisis which was then followed by an attempt by Chinalco of China to buy up to 19% of Rio Tinto.^[2]

Though not a major producer of gold and uranium at present that will change when BHP's AUS$1.286 trillion olympic dam deposit in South Australia, 560 km's north of Adelaide begins producing. 59% of the mine's value comes from its large reserves of copper (4th highest of any deposit in the world), uranium (largest deposit in the world), gold (10.3% of the mine's value, 5th largest reserves) and silver deposit starts operating.^[3]

Business and Financials

On June 25, 2003, BHP Billiton Plc listed its sponsored American Depository Receipts security on the New York Stock Exchange and, as a result, BHP Billiton now maintains an American Depository Receipt listing of both BHP Billiton, Limited and BHP Billiton Plc on the New York Stock Exchange. On March 8, 2005 BHP announced a cash offer for the entire issued capital of nickel and uranium mining producer WMC Resources, Ltd. BHP Billiton's AUD$7.85 per share cash bid, valuing WMC at AUD$9.2B (US$7.3B).

In 2010 the company had a revolving credit facility of US$3.0 billion, the same amount available in 2009 and 2008, it remains available since it has gone unused.^[4] The significant amount of credit and cash at its disposal has allowed it to pursue large acquisitions in an effort to consolidate a more diverse resource base (potash which is new to the company has become a focal point for expansion). During the 2010 fiscal year moody's made no change to BHP's credit rating (A1) despite acknowledging a slight degree of liquidity risk (standard and poor's rating is A+).

Financials key data (directly from BHP 2010 Report)
USD $ mil	2010[4]	2009	Change	2008
Revenue	52,798	50,211	5.15%	59,473
Oper Profit	20,031	12,160	64.73%	24,145
Earnings before taxes underlying	19,719	18,214	8.26%	24,282
Net oper cash flow	467	1,533	(70.0)%	2,113
total assets	88,852	78,770	12.8%
net debt	3,308	5,586	(40.78)%
current/noncurrent debt	15,643	16,419	(4.73)%
financial assets	21,691	18,610	16.56%
total expenses	33,754	39,183	(13.86)%	36,638
total tax	6,563	5,279	24.32%	7,521
dividend/share	83c	82c	1.2%	56c

On February 7, 2007, management announced that the company would increase its capital management program by an additional $10B bringing the total allocation to $11.3B. The company earmarked $2.5B for an Australian off-market buy-back in 1Q07, with the remaining $8.8B being allocated to an on- market UK buy-back over the next 18 months. Since August 2006 $1.7B has been returned to shareholders through on-market purchases of 92,285,000 BHP shares.

BHP Billiton Ltd. (ADR: BHP), reported record annual profit on August 18th, 2008 and said it expects demand for commodities to remain strong. Net profit for the year ended June 30 climbed 14.7% to $15.39 billion, from $13.42 billion in the previous year. Earnings before interest and tax, was $24.28 billion, up 21%. At Cannington it also owns lead resources.

Business Overview

Production

pg.63 in'10 20F[4]	% share	2010	2009	2008
diamonds (mil ct)	80%	3.050	3.221	3.341
titanium '000 T	37.76%	434	654	643
nickel '000 T	100%	176.2	173.1	167.9
cobalt T	100%	100	1,400	1,700
iron ore (mil T)	85%	124.962	114.415	112.260
manganese mil T	44.4%-60%	6.124	4.475	6.575
meta coal Mt	24.6Mt50% 13Mt80-100%	37.381	36.416	35.183
energy coal Mt	100% (33%Colombia)	66.131	66.401	80.868

All of the company's diamond production comes from Canada (EKATI, NWT), all of the metallurgical coal from Australia while about 80% of energy coal comes from various parts of America including San Juan and Colombia, the rest comes from Australia. Outside of Australia the NWT, Canada is the only source of dimaonds for both Rio Tinto and its biggest cometitor, BHP. In 2010 Canada accounted for 100% of BHP's diamond production (3 million carats contributing 2.5% to total EBITDA) and 28.5% of Rio Tinto's production (3.9 million carats, 17% higher than 2009). Rio Tinto gets its diamonds from the Diavik diamond mine and another larger one in Australia, BHP gets its diamonds from the EKATI diamond mine near Yellowknife.

• Australia - just over half of manganese production the other 44-50% is from South Africa, both regions have been growing production at rapid rates. 91% of iron ore, all of the company's cobalt production,
• Colombia - Energy coal, 28% (2010) of the nickel produced by BHP,
• South Africa - all titanium minerals (titanium slag, rutile, zircon), close to half of the manganese.
• Canada - all of the diamond business (has been just over 3 million carats every year from 2008 to 2010).^[4] The EKATI diamond mine contributes 2.5% of the BHP's EBIT (2010).

olympic dam deposit equals Australia's gdp (2011)

olympic dam in South Australia is the world's biggest uranium deposit, 4th biggest copper deposit and 5th biggest gold deposit. With a valuation of AUS$1.286 trillion dollars it is among the most valuable mineral deposits in the world. The copper portion is worth $764 billion, the uranium $377 billion and the gold $133 billion (February 2011). The deposit, which increased in value by 50% in the second half of 2010, is now 13.8% more valuable than Norilsk in Siberia and 25.2% more than Andina in Chile.^[3] Much of the increase in the olympic dam's value is due to discoveries of additional copper (makes up 59.4% of the deposit's price tag) which both good and bad, good because it lengthens the life of mine and increases BHP's copper resource base, bad because it's mixed in with uranium which BHP isn't interested in exploiting until there's more incentive to (not many current buyers). Due to improved market prices and higher reserves BHP's Western Mining plans to expand the mine's capacity enabling it to price at a rate five times greater than it was previously prepared for.

That compares to Australia's 2010 gdp of AUS$1.315 trillion.

Shareholders (June 2010)

Australia and England are the main sources of investment with 97.87% (99.05% including New Zealand) of BHP Limited shares owned by Australians and 79.7% of BHP plc shares owned by people in England (97% of shares outside of England are owned in South Africa). 69% of BHP Limited is corporate owned while 99.36% of BHP plc is corporate owned.^[4]

Trends and Forces

Canadian Potash

In October 2010 BHP made an $40 billion unsolicited bid for Potash Corp. of Saskatchewan Inc., the world's largest Potash producer and top 3 producer of nitrogen and phosphate. The deal had very little support in Canada, initially Potash Corp questioned whether the offer was a fair valuation of the company but the major stumbling block ended up being both the federal and provincial governments in Canada (Saskatchewan, Ontario and Quebec) which formed a strong opposition.^[5] Canada's industry leader, Tony Clement finally put a stop to the takeover on November 4, 2010 citing the $C3 billion revenue loss the deal would mean for Saskatchewan making it not a net benefit to Canada.^[6] Potash Corp is the world's largest integrated fertiliser company and largest producer of potash.

Earlier in 2010 (January 28) regional subsidiary BHP Billiton Canada acquired Athabasca Potash for $341 million in a friendly takeover.^[7]

Possible Merger with Rio Tinto

On November 12, 2007, BHP released details of a merger proposal with Rio Tinto, which comprised a 3-for-1 share indicative offer, or 28% premium to Rio Tinto shareholders based on the combined volume weighted average market capitalizations of Rio Tinto Limited and Rio Tinto plc over the month ended 31 October 2007 and the volume weighted average BHP Billiton share prices over the same period. According to management, the combined entity could eventually deliver annual savings of $3.7 billion largely through the removal of duplication as well as procurement and operating efficiency savings, with benefits of $1.7 billion by the third year, and additional cost savings of $2 billion after seven years. The merged company would have more than $70 billion in annual sales and become the world's largest producer of copper and aluminum, and the second-largest provider of iron ore. In addition, BHP management also announced it intended to commence a $30 billion share buy-back post completion of the merger.

Competition

Main competitor domestically (and abroad because of its size) is Rio Tinto. Though it used to be much smaller recent organic growth and acquisitions have made Rio Tinto almost 60% the size of BHP (market cap). They are both large producers of iron ore^[8] / steel (it makes up a larger part of Rio Tinto's cash flow), diamonds (Rio Tinto produces in Canada as well, production is about 3 times higher for Rio Tinto than BHP). The business differ in terms of the range of products, Rio Tinto is more highly diversified in terms of the range of minerals it produces precious metals like Gold (in the range of a million ounces a year (2010 was 777,000 though which was down from the year before but it's largest project Oyu Tolgoi has over 40 million ounces of gold in reserves) and silver (BHP doesn't however BHP owns the world's 5th biggest gold deposit (olympic dam) which isn't producing) but BHP maintains a growing oil and gas business which Rio Tinto doesn't have. Rio Tinto also produces thermal coal which BHP isn't involved in. They are both producers of aluminum but Rio Tinto is by far the largest due mostly to its acquisition of Alcan in October 2007. Rio Tinto can also be considered more of a multinational company with operations in many non traditional markets (like Iceland, Oman and India) and more shareholders outside of the UK and Australia (9% of Rio Tinto is owned by Chinalco the aluminum company of China). In 2010 BHP Billiton led all companies in silver primary production.

References

1. ↑ Billiton takeover "marvellous": PM (2001-03-20).
2. ↑ BHP, Rio Tinto Sign Joint Venture Deal (2009-12-07).
3. ↑ ^{3.0 3.1} Mine equals Aussie economy (2011-02-11).
4. ↑ ^{4.0 4.1 4.2 4.3 4.4} BHP Billiton 2010 20 F Annual Report page 11, 245 (2010).
5. ↑ BHP Potash Bid Sweetener Said Rejected by Saskatchewan (2010-10-20).
6. ↑ The potash decision: Two and a half cheers for Tony Clement (2010-11-04).
7. ↑ BHP Billiton bides $341 million for Athabasca Potash (2010-01-28).
8. ↑ World iron ore producer rankings