BHP Billition Stock Recommendation

Submitted by Craig Strzelecki on 26 March, 2007 - 18:20

BHP Billiton has a Buy 2 stock recommendation and a price target of $34 per share from market analyst UBS. The analyst has visited Samarco Iron Ore in Brazil on Day 4 of the BHP site visit. Day 4 of the BHP Billiton trip to Latin America took in a tour of the Samarco pellet plant in Brazil. Current production is 14Mtpa (100% basis), but is currently undergoing an expansion to 21.5Mtpa, with completion expected H1 CY08. Samarco represents 1.6% of operating EBIT for BHP Billiton and some 1.4% of our estimated NPV. While Samarco is a low cost producer, costs have risen by 75% to US$35/t over the last 4 years. The principal reason for the increase in costs has been rising fuel and electricity costs, which together account for 30% of operating costs. The rise in iron ore price has also had an impact as 35% of Samarco's iron ore requirements are sourced from third parties, namely CVRD. BHP announced an expansion of Samarco in 05 from 16.5 to 24Mtpa at a cost of US$590m (BHP's 50% share). The project remains on time and budget and if progress continues at the current pace then completion could be in early 08 against official start up of H1 CY 08. While Samarco is a small asset, it does provide insight into the Brazilian iron ore industry for BHP as well as the pellet market. In the meantime BHP has gained approvals for its Rapid Growth Project 4. BHP announced the approvals have been given for the Rapid Growth Project 4 (RGP-4) which is expected to increase iron ore production by c. 26Mtpa to 155Mtpa (100% basis) at a cost of US$1.85bn (BHP share). This follows the RGP-3 project which is expected to increase production by 20Mtpa from the current capacity of 109Mtpa to 129Mtpa by the end of CY07 at a cost of US$1.3bn (BHP Share). On a unit basis, RGP-4 is costing BHP Billiton US$82/t of iron ore. This compares to RGP-3 which is costing the company approximately US$62/t (excluding $235m in sustaining capital). Additionally, compared to recent expansion projects by BHP and Rio Tinto, RGP-4 shows how capital costs have increased across the industry with average costs of c. US$62/t. In Feb 07, BHP indicated that RGP-4 was expected to increase production to 152Mtpa at a cost of US$1.8bn so the news is not too dissimilar. The analyst has modelled US$1.7bn capital costs, and 153Mtpa of capacity in FY11 and therefore costs and production are slightly above our estimate. While start date is sooner than expected, the net result is some minor downward adjustments to earnings and valuation.

BHP Billiton Limited is listed on the Australian Stock Exchange (ASX) under stock code BHP. You can view their investor website here. BHP was listed on the ASX on 13 August, 1885. Charles "Chip" Goodyear is the CEO of BHP Billiton and Don Argus the Chairman. BHP Billiton was created through the Dual Listed Companies (DLC) merger of BHP Limited (now BHP Billiton Limited) and Billiton Plc (now BHP Billiton Plc), which was concluded on 29 June 2001. BHP Billiton Limited and BHP Billiton Plc continue to exist as separate companies, but operate on a combined basis as BHP Billiton. The headquarters of BHP Billiton Limited, and the global headquarters of the combined BHP Billiton Group, are located in Melbourne, Australia. BHP Billiton Plc is located in London, United Kingdom. The company is principally involved in minerals exploration, production and processing (particularly coal, iron ore, copper and manganese ore) and hydrocarbon exploration, production and refining. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade BHP. Check your charts and good luck with your share trading!

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