BHP_BILLITON_LTD(BHP.AX)：WAVING_GOODBYE_TO_THE_OUTER_HARBOUR-2012-08-16.ppt

52,48,44,40,36,32,28,1,2,deutsche bank markets research,rating buy australasia australia,company bhp billiton ltd,date 14 august 2012 forecast change,m&m - diversified resources,reuters,bloomberg,exchange ticker,price at 13 aug 2012 price target - 12mth 52 week range (aud),32.89 43.10 39.87 - 30.18,bhp.ax,bhp au,asx,bhp,all ordinaries,4,303,waving goodbye to the outer harbour,paul young research analyst,grant sporre research analyst,scrapping the outer harbour would be a positive catalyst the outer harbour project was highlighted as a serious growth option about 18-months ago, after being delayed for a number of years. however, due to marginal economics (13% irr), questionable affordability, and competition from other projects across the group including de-bottlenecking the inner harbour (24% irr), we think bhpb will shelve this project once more. capex (us$24bn) could be allocated to higher returning projects in petroleum and copper and 100mtpa less iron ore in the market would underpin the value of the existing pilbara business. although we have reduced our valuation by 1.5%, we think further capital discipline will be positively received. buy. capex inflation makes the outer harbour an even more challenging project the economics of the 100mtpa outer harbour project were always challenging in our view, exacerbated by capex inflation. the project requires us$15bn of “flag fall” capex on infrastructure including a 4km jetty which cannot be materially reduced in size or cost. bhpb is currently studying a smaller 50mtpa outer harbour option. we estimate that the smaller 50mtpa option would cost c.u$15bn (100% basis), and will deliver a lower return of 12%. shelving the outer harbour underpins the value of the existing pilbara business removing 100mtpa from future seaborne supply is likely to support the iron ore price over the medium term, effectively lifting the value of the base pilbara,(+61) 2 8258-2587 kaan peker research analyst (+61) 2 8258-1424 rob clifford research analyst (+44) 20 754-58339 price/price relative,(+44) 20 754-58170 ,business. de-bottlenecking the inner harbour from 220mt to 250mtpa+ would cost a mere c. us$3.5bn (us$120/t). we value this option at c. us$5bn and,8/10,2/11 bhp billiton ltd,8/11,2/12,calculate an irr of c. 24%. after this analysis, we have removed the outer,all ordinaries (rebased),harbour and assume de-bottlenecking as our base case. long growth options which could deliver higher returns, and ease gearing scrapping the outer harbour would enable bhpb to redirect capital to higher,performance (%) absolute all ordinaries,1m 7.9 4.5,3m -4.3 -0.9,12m -13.9 1.5,returning growth options in our view; such as de-bottlenecking of the inner harbour, the gom, the eagle ford and permian, and expansions of escondida and spence. jansen potash is a better long-term option, as the risky capex (the shaft) is nearly complete, and the capex (us$15bn) can be phased. a further positive to scrapping the outer harbour, is the reduction in forecast gearing over the longer-term, with our fy20 gearing estimate down from 38% to 16%. valuation lower after removing the outer harbour, risks (see p9 for details) our pt is set broadly in line with our a$43.1/sh npv using a nominal wacc of 8.9%. risks: variances in commodity prices/exchange rates, project timing. forecasts and ratios,year end jun 30 net profit (usdm) per (x),2010a 12,469 15.6,2011a 21,684 10.5,2012e 16,998 10.9,2013e 16,060 11.6,2014e 17,976 10.3,source: deutsche bank estimates, company data pre-exceptionals/extraordinaries multiples and yields calculations use average historical prices for past years and spot prices for current and future years _ deutsche bank ag/sydney all prices are those current at the end of the previous trading session unless otherwise indicated. prices are sourced from local exchanges via reuters, bloomberg and other vendors. data is sourced from deutsche bank and subject companies. deutsche bank does and seeks to do business with companies covered in its research reports. thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. disclosures and analyst certifications are located in appendix 1. mica(p) 072/04/2012.,14 august 2012 m&m - diversified resources bhp billiton ltd,model updated:13 august 2012,fiscal year end 30-jun,2009,2010,2011,2012e,2013e,2014e,running the numbers,financial summary,australasia australia m&m - diversified resources bhp billiton ltd,db eps (usd) reported eps (usd) dps (usd) bvps (usd) valuation metrics price/sales (x),1.92 1.05 0.82 7.18 2.7,2.23 2.27 0.87 8.72 3.7,4.06 4.42 1.01 10.67 3.1,3.18 2.51 1.11 12.52 2.5,3.00 3.00 1.15 14.30 2.4,3.36 3.36 1.19 15.93 2.2,reuters: bhp.ax buy price (13 aug 12) target price 52 week range market cap (m),bloomberg: bhp au aud 32.89 aud 43.10 aud 30.18 - 39.87 audm 175,011,p/e (db) (x) p/e (reported) (x) p/bv (x) fcf yield (%) dividend yield (%) ev/sales ev/ebitda ev/ebit,12.6 23.0 3.6 7.1 3.4 2.8 6.4 7.8,15.6 15.3 3.8 4.5 2.5 3.8 8.1 10.1,10.5 9.6 4.1 8.9 2.4 3.2 6.8 8.0,10.9 13.8 2.6 5.9 3.2 2.7 6.0 7.4,11.6 11.6 2.3 2.0 3.3 2.8 6.3 7.9,10.3 10.3 2.1 4.5 3.4 2.6 5.7 7.2,usdm 184,810,income statement (usdm),company profile bhp billiton limited is an international resources company. the companys principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration, production, and refining. price performance 52 48 44 40 36 32 28 aug 10nov 10feb 11may 11aug 11nov 11feb 12may 12,sales ebitda ebit pre-tax profit net income cash flow (usdm) cash flow from operations net capex free cash flow equity raised/(bought back) dividends paid net inc/(dec) in borrowings other investing/financing cash flows net cash flow change in working capital balance sheet (usdm) cash and cash equivalents property, plant & equipment goodwill,50,211 22,275 18,214 11,617 5,877 18,863 -9,328 9,535 29 -4,969 3,575 -331 6,632 -2,665 10,833 49,032 398,52,798 24,513 19,719 19,572 12,722 17,920 -9,191 8,729 12 -4,895 -588 -302 1,598 2,115 12,456 55,576 414,71,739 34,123 29,010 31,255 23,648 31,061 -11,067 19,994 -9,828 -5,144 -799 -5,355 -2,402 -461 10,084 68,468 544,72,776 33,192 26,954 21,123 13,428 26,474 -15,622 10,852 -65 -5,923 5,099 -14,478 -5,752 -1,052 2,998 97,420 987,75,761 33,345 26,442 25,772 16,060 23,672 -19,935 3,737 0 -6,118 4,000 926 -768 1,113 3,156 111,257 1,456,82,604 37,213 29,404 28,633 17,976 25,989 -17,615 8,374 0 -6,326 2,200 -1,562 1,962 2,493 3,556 122,667 1,910,bhp billiton ltd margin trends 48 44 40 36 32,all ordinaries (rebased),other assets total assets debt other liabilities total liabilities total shareholders equity net debt key company metrics sales growth (%),18,507 78,770 16,419 21,640 38,059 40,711 5,586 -15.6,20,406 88,852 15,764 23,759 39,523 49,329 3,308 5.2,23,795 102,891 15,907 29,229 45,136 57,755 5,823 35.9,23,255 124,660 24,567 32,285 56,852 67,808 21,569 1.4,24,218 140,087 28,567 34,127 62,694 77,393 25,411 4.1,26,055 154,187 30,767 37,198 67,965 86,223 27,211 9.0,09,10,11,12e,13e,14e,db eps growth (%),-30.1,16.4,82.0,-21.6,-5.5,11.9,ebitda margin growth & profitability 40 30 20 10 0,ebit margin,50 40 30 20,payout ratio (%) ebitda margin (%) ebit margin (%) roe (%) net debt/equity (%) net interest cover (x),77.6 44.4 36.3 27.4 13.7 33.5,38.1 46.4 37.3 28.2 6.7 43.0,22.7 47.6 40.4 41.2 10.1 51.7,44.0 45.6 37.0 27.6 31.8 36.9,38.1 44.0 34.9 22.5 32.8 39.5,35.2 45.1 35.6 22.3 31.6 38.1,-10 -20,09,10,11,12e,13e,14e,10 0,dupont analysis ebit margin (%) x asset turnover (x),36.3 0.6,37.3 0.6,40.4 0.7,37.0 0.6,34.9 0.6,35.6 0.6,x financial cost ratio (x),1.0,1.0,1.0,1.0,1.0,1.0,solvency 35 30 25 20 15 10 5 0 09,10,sales growth (lhs) 11 12e,13e,roe (rhs) 60 50 40 30 20 10 0 14e,x tax and other effects (x) = roa (post tax) (%) x financial leverage (x) = roe (%) annual growth (%) x nta/share (avg) (x) = reported eps annual growth (%) source: company data, deutsche bank estimates,0.3 7.6 2.0 15.0 -66.8 7.0 1.05 -61.8,0.7 15.2 1.9 28.8 91.5 7.9 2.27 116.6,0.8 24.7 1.8 44.9 56.2 9.8 4.42 94.5,0.5 11.8 1.8 21.8 -51.5 11.5 2.51 -43.2,0.6 12.1 1.9 22.5 3.4 13.3 3.00 19.6,0.6 12.2 1.8 22.3 -0.7 15.0 3.36 11.9,net debt/equity (lhs) paul young +61 2 8258-2587 page2,net interest cover (rhs) ,deutsche bank ag/sydney,18%,-,-,materials,3%,0%,-,aluminium,14 august 2012 m&m - diversified resources bhp billiton ltd bhp billiton operational and financial summary data,fx /commodity as s ump tions (nom inal) audusd gold (us$/oz) oil - wti (us$/bbl) copper (us$/lb) aluminium (us$/lb) nickel (us$/lb) iron ore - lump (us$/t) - fob iron ore - fines (us$/t) - fob iron ore - fines (us$/t) - cif coking coal (us$/t) steaming coal (us$/t) us natural gas (us$/mmbtu) potash (us$/t),fy09a 0.74 875 70 2.23 0.85 6.03 114.5 81.5 89.5 257.3 111.5 5.91 748,fy10a 0.88 1,093 75 3.04 0.92 8.82 88.6 75.4 83.4 146.8 77.8 4.08 456,fy11a 0.99 1,373 90 3.94 1.08 10.90 168.8 153.8 161.8 251.3 106.0 4.20 433,fy12f 1.03 1,681 95 3.74 1.00 8.85 152.2 140.3 148.3 261.3 126.3 3.08 438,fy13f 0.98 1,950 90 3.57 0.95 8.39 147.8 135.8 143.8 248.8 110.7 3.31 475,fy14f 0.96 1,900 100 3.49 1.00 9.07 135.3 123.3 131.3 246.3 98.8 4.03 500,fy15f 0.92 1,703 100 3.32 1.02 8.96 128.0 116.0 124.0 220.0 103.5 4.50 500,fy16f 0.88 1,510 103 3.15 1.05 8.73 115.5 103.5 111.5 200.0 101.5 4.75 513,fy17f 0.84 1,316 105 2.98 1.08 8.51 103.0 91.0 99.0 180.0 100.3 4.75 525,fy18f 0.81 1,301 108 3.28 1.30 9.60 105.0 91.0 99.0 185.6 105.5 4.87 538,fy19f 0.80 1,334 110 3.37 1.33 9.84 107.6 93.3 101.3 190.2 108.2 4.99 552,np v (hj13) aluminium base metals diamonds & potash energy coal iron ore manganese met coal petroleum - shale gas petroleum - conventional stainless steel materials group & unallocated investments and other less net debt,us$mn 4689 37930 9576 9032 78786 2046 14155 20075 38511 4052 -6987 0 -25499,us$/sh 0.88 7.13 1.80 1.70 14.81 0.38 2.66 3.77 7.24 0.76 -1.31 0.00 -4.79,au$/sh 1.06 8.59 2.17 2.05 17.84 0.46 3.21 4.55 8.72 0.92 -1.58 0.00 -4.91,total,186,368,35.02,43.06,key financial metrics,underlying earnings (us $m),10,722,12,469,21,684,16,998,16,060,17,976,19,021,18,162,16,775,19,746,20,895,w acc (nom inal),8.9%,s hares,5,321.1m,free cash flow (us$m) - before debt & equity moveme net debt (us$m) gearing (nd/e - %) roe (%),2,843 5,586 13.7% 27.4%,2,010 3,308 6.7% 28.2%,8,472 5,823 10.1% 41.2%,(10,463) 21,569 31.8% 27.6%,(4,768) 25,411 32.8% 22.5%,(238) 27,211 31.6% 22.3%,1,509 25,703 26.5% 21.1%,1,336 24,367 22.7% 18.1%,(3,384) 27,751 23.8% 15.2%,(1,665) 29,416 23.2% 16.5%,(451) 29,867 21.6% 16.0%,roa (%),27.4%,27.6%,33.8%,24.3%,20.5%,20.5%,20.2%,17.9%,15.2%,16.0%,15.8%,v aluation (hj2013),p roduction,copper (kt) iron ore (mt) - attributable iron ore (mt) - pilbara (100%) petroleum (mmboe) - shale gas petroleum (mmboe) - conventional petroleum (mmboe) - total coal - hard coking (mt) coal - thermal (mt) aluminium (kt) diamonds (kcts) nickel (kt) manganese ore (kt) manganese alloys (kt) potash (mt),1,207 114 125 142 142 36 68 1,233 3,221 173 4,475 513 -,1,075 125 134 159 159 37 66 1,241 3,050 176 6,124 583 -,1,139 134 144 6 153 159 33 70 1,246 2,506 153 7,093 753 -,1,094 159 174 84 138 222 33 71 1,153 1,784 158 7,931 602 -,1,235 168 184 102 139 241 31 75 1,148 2,209 171 7,535 505 -,1,370 186 204 140 141 281 36 76 1,263 2,187 171 8,026 515 -,1,357 209 228 177 116 293 39 78 1,218 2,198 171 8,308 521 -,1,404 221 242 203 100 303 41 79 1,253 2,193 171 8,387 528 -,1,413 232 250 231 85 316 42 80 1,248 2,196 171 8,514 524 -,1,389 253 250 262 78 340 43 80 1,263 2,194 171 8,620 526 1.0,1,381 279 250 275 78 353 43 81 1,268 2,195 171 8,738 525 2.0,petroleum - shale gas 9% met coal 7% manganese 1% iron ore 36%,petroleum - conventional stainless steel materials 2% aluminium 2% base metals 17% diamonds & potash 4% energy coal 4%,revenue split (2013f) rev enue (us $m),petroleum - shale gas petroleum - conventional petroleum - total,- 7,211 7,211,- 8,782 8,782,107 10,630 10,737,2,152 11,195 13,347,3,163 11,348 14,511,5,461 13,141 18,602,7,078 13,054 20,132,7,908 13,314 21,222,8,634 13,656 22,290,9,521 14,922 24,443,9,946 15,615 25,561,iron ore 30%,met coal,aluminium,4,151,4,353,5,221,4,670,4,713,5,324,5,306,5,573,5,776,6,807,7,353,10%,diamonds &,base metals iron ore met coal manganese diamonds & potash energy coal,7,105 10,048 8,087 2,536 896 6,524,10,409 11,139 6,059 2,150 1,272 4,265,14,152 20,412 7,573 2,423 1,517 5,507,11,810 22,404 7,495 2,251 1,288 6,196,14,476 22,876 7,025 2,256 719 6,140,15,147 23,054 7,785 2,533 625 5,755,14,173 24,890 7,699 2,401 565 6,317,13,766 23,766 7,458 2,406 564 6,334,12,963 21,813 7,073 2,407 564 6,308,13,957 22,004 7,459 2,613 1,116 6,624,14,407 22,552 7,745 2,705 1,696 6,806,base metals 19% aluminium 6%,potash 1% manganese 3% energy coal 8%,stainless steel materials group & unallocated and intersegment t ot al,2,355 1,298 50211,3,617 752 52798,3,861 336 71739,3,032 283 72776,3,218 295 76230,3,459 322 82604,3,422 332 85236,3,337 330 84755,3,255 323 82772,3,658 347 89029,3,748 362 92935,petroleum - conventional 15%,petroleum - shale gas 4%,stainless steel materials 4%,cap ex (us$m),grow th,capex split (2013f),petroleum - shale gas petroleum - conventional petroleum - total aluminium,- 633 633 703,- 1,025 1,025 844,163 1,178 1,341 1,093,3,287 1,742 5,029 616,4,900 1,308 6,208 50,5,700 805 6,505 50,6,200 910 7,110 50,6,325 954 7,279 -,6,050 790 6,840 -,5,700 451 6,151 -,5,400 417 5,817 -,stainless steel diamonds & potash energy coal specialty 2% products 0% petroleum -,base metals carbon steel materials diamonds & specialty products potash energy coal stainless steel materials,485 1,881 47 - 630 285,154 3,703 (68) 80 673 41,848 3,811 74 160 451 345,1,378 4,765 154 200 510 143,1,850 5,370 - 300 400 40,1,600 3,685 - 300 50 40,2,500 2,000 - 1,000 - -,3,300 1,000 - 1,500 - -,4,800 1,000 - 4,602 - -,5,625 824 - 3,566 - -,7,253 515 - 3,655 - -,carbon steel materials 38%,shale gas 35%,other (represents small projects),1,082,587,93,10,1,000,91,93,100,113,122,tot al growt h s ust aining t ot al capex exploration tot al capex incl. explorat ion,5,746 3,066 8,811 1,243 10,054,7,039 3,014 10,053 1,333 11,386,8,216 3,394 11,610 1,240 12,850,12,804 4,393 17,198 2,468 19,666,15,218 5,517 20,735 2,244 22,979,12,230 5,385 17,615 2,203 19,818,12,751 5,285 18,036 1,723 19,760,13,172 5,214 18,387 1,738 20,125,17,341 5,250 22,592 1,731 24,323,16,280 5,508 21,788 1,742 23,530,17,362 5,708 23,070 1,745 24,814,base metals 13%,petroleum - conventional 0% 9%,ebit split (2013f) ebit (us $m),petroleum - shale gas,0,299,354,-179,-119,1,449,3,542,4,831,5,453,6,162,6,181,petroleum - conventional petroleum - total aluminium base metals carbon steel materials,4,085 4085 192 1292 12289,4,274 4573 406 4632 8766,5,976 6330 266 6790 16695,6,723 6545 -299 4035 15850,6,037 5918 -578 5009 16121,7,492 8941 -399 5349 16078,7,287 10829 -284 4416 16272,6,940 11771 -226 3457 14545,6,692 12145 -140 2627 12286,6,955 13117 477 3601 12836,7,226 13407 790 4144 13317,iron ore 48%,diamonds & specialty products energy coal stainless steel materials group & unallocated t ot al,145 1460 -854 -395 18214,485 730 668 -541 19719,587 1129 588 -405 31980,152 1388 -165 -551 26954,190 824 -381 -640 26463,104 190 21 -693 29591,31 752 26 -877 31166,34 758 -1 -789 29548,38 813 22 -809 26982,85 1099 439 -826 30827,357 1198 472 -852 32834,base metals 17% aluminium -2%,met coal 6% diamonds 1% manganese 1%,ebit m argins petroleum - shale gas petroleum - conventional,- 57%,- 52%,32% 62%,-8% 60%,-4% 53%,24% 59%,43% 61%,49% 61%,48% 61%,47% 61%,45% 62%,petroleum - conventional 21%,petroleum - shale gas 0%,energy coal ssm 3% -1%,petroleum - total aluminium base metals carbon steel materials diamonds & specialty products energy coal stainless steel materials tot al,57% 5% 18% 59% 16% 22% -36% 36%,52% 9% 44% 45% 38% 17% 18% 37%,59% 5% 48% 55% 39% 21% 15% 45%,49% -6% 34% 49% 12% 22% -5% 37%,41% -12% 35% 50% 26% 13% -12% 35%,48% -7% 35% 48% 17% 3% 1% 36%,54% -5% 31% 47% 5% 12% 1% 37%,55% -4% 25% 43% 6% 12% 0% 35%,54% -2% 20% 39% 7% 13% 1% 33%,54% 7% 26% 40% 8% 17% 12% 35%,52% 11% 29% 40% 21% 18% 13% 35%,source: company data, db estimates,deutsche bank ag/sydney,page3,14 august 2012 m&m - diversified resources bhp billiton ltd scrapping the outer harbour the outer harbour vs. the inner harbour,after featuring in the growth pipeline “bubble chart” for many years (albeit with scant detail on timing and cost), the outer harbour project (formerly known as quantum 1) moved into the feasibility study phase in 2011. the project had been included in future options since 2007 but failed to advance further during the bid for rio tinto in 2008 and then the subsequent attempt to merge bhpbs pilbara assets with rio tintos in 2009. the attempt to combine the two pilbara iron ore businesses, arguably delayed the decision to advance the outer harbour, as the iron ore jv would have provided bhpb access to rios world class cape lambert port which has almost unlimited expansion potential. the outer harbour has since been designed and priced at arguably peak capital intensity, with pilbara cost inflation probably the highest in the mining world. we estimate the 100mtpa project will cost us$24bn (100% basis), and at our long run iron ore price of us$80/t (cif fines) and 0.80 audusd, the project delivers a relatively low 13.4% irr and an npv of us$10.7bn (c. us$2/sh). bhpb is currently analyzing whether a smaller 50mtpa option can be more value accretive. the smaller option would likely involve expanding existing mines and no triple trackin