MINING FINANCE / INVESTMENT

BHP Billiton streets ahead of the rest

The latest numbers show BHP Billiton is continuing to widen its hefty lead on its global diversified mining peers.

JOHANNESBURG - - 

BHP Billiton's results for its fiscal year to 30 June 2010 unravel much about why the group recently launched a USD 40bn hostile bid for PotashCorp, the world's biggest miner of raw materials for fertiliser (NPK, nitrogen, phosphate and potash). BHP Billiton, the world's biggest diversified resources group (a miner, it also produces oil and gas), reported free cash flow (operating cash flow, less capital expenditure) of USD 8.6bn for the fiscal year.

The first calendar half of 2010 saw free cash flow accelerate sharply to USD 7.5bn, compared to USD 1.6bn for the same period in 2009. Only Rio Tinto, the world's No 3 miner, by market value, was vaguely in touch, producing USD 5.4bn in the first half of 2010. The fundamental difference is that Rio Tinto made very little, a starved-looking USD 100m, during the first half of 2009. Even that was better than most mining companies during that period, after the horrible collapse in commodity prices across 2008.

It was a time when Anglo American suspended dividends, as did Xstrata (both have since reinstated). The difference is in BHP Billiton's diversity, its focus on long-life, low-cost, huge, operations, and its canny ability to keep its nose out of potentially ruinous acquisitions. During the 2010 fiscal year, iron ore was once again the main contributor at the underlying earnings level, at USD 6bn, followed by oil & gas, and base metals (mainly copper). Coking coal was some way behind, followed by steam coal, manganese, nickel, diamonds & other, and aluminum. All told, underlying earnings were nearly USD 20bn.

Rio Tinto's free cash flow for the first half of 2010 was sharply boosted by a continuing fall in capital expenditure. From a peak of USD 8.6bn in 2008, Rio Tinto's capital expenditure has fallen back, to USD 1.8bn, during the first half of 2010. At BHP Billiton, capital expenditure has been rising, from USD 6 to 7bn in 2007 and 2008, to USD 8 to 9bn in the next two fiscal years.

Rio Tinto may have allowed capital expenditure to fall below trend lines in the aftermath of the horribly overpriced USD 38bn cash acquisition of Alcan in 2007. Overburdened by debt, the group raised USD 14.9bn in a rights issue in 2009, and sold off one asset after another. The core assets left behind have certainly delivered, but Rio Tinto's competitive position is not quite what it was two years ago.

At Brazilian supergroup Vale, capital expenditure is running pretty much at the same level as BHP Billiton, swallowing heavy chunks of operating cash flow. As the world's biggest individual player in seaborne iron ore, Vale can pack a punch when iron ore prices are good and great; in 2008, Vale delivered USD 17.1bn in operating cash flow (compared to Rio Tinto's USD 14.9bn, and BHP Billiton's 17.8bn).

In sharp contrast to BHP Billiton and Rio Tinto, Vale's balance sheet generally has been increasingly stretched in the past few years by its very heavy capital expenditure programme, plus acquistions, mainly in fertiliser, over the past year and more. Vale remains stung by its seriously overpriced 2007 acquisition of Inco, a nickel group, for USD 18.9bn in cash.

There are also a good number of questions that can be raised over Vale's ability to deliver new mine builds on time and on budget. Onça Puma, a nickel mine in the Brazilian state of Pará, was announced in July 2006. Investment was put at USD 1.4bn, with start up towards the end of 2008. The latest numbers are for USD 2.7bn and start up towards the end of this year.

Vale has not yet even given the full green light for the build of Serra Sul, its proposed new giant iron ore mine in Brazil. There are equally pressing, and relatively new, demands from Simandou, in Guinea. Serra Sul was announced in 2007, with a budget of USD 10.1bn, with start up for the first half of 2012. The latest numbers are for USD 11.3bn and start up towards the end of 2013, subject to approval by the board of directors.

Xstrata appears to be busy with rebuilding from the centre, after more than 30 acquisitions since it first appeared in 2001. The USD 18.9bn cash acquisition of Falconbridge in 2006 continues to leave its marks. For Anglo American, it was at cyclical highs in the iron ore market, during 2007 and 2008, that it spent a magnificent USD 6.7bn on iron ore assets in Brazil, including 100% of Minas Rio, and 49% of LLX Minas Rio (port of Açu).

BHP Billiton continues to widen the gap. The group is not only one of the world's most formidable generators of free cash, but one which times significant moves with careful finesse. The latest set of numbers show net debt, including cash, of USD 3.3bn, compared to USD 12.2bn at Rio Tinto and USD 17.7bn at Vale. Even at Anglo American, the comparable figure is USD 10.3bn.

BHP Billiton has the capacity to raise the debt that will be needed to fund the acquisition of PotashCorp, should the deal be closed. In a good year, such as 2008, PotashCorp can produce more than USD 3bn in operating cash flows. If the longer term trend lines for supply for and demand of raw materials for fertiliser are roughly reliable, PotashCorp can anticipate a rosy future.