PM Bolt-On: Nae bad, as the Scotsman would have you believe at BHP Billiton (BLT)...and some. Come on the cheap money, lance it...!

Good Evening,

Due to the asx, one forgot to press publish.

As of last night, the themes were remarkably predictable thanks in part to the S32 interims (Short 32). BLT's expectations and the marked denial were evidenced in the webcast and the consensus. More on this in due course, as a teaser, could there be a capex issue for short32?

BHP Billiton's (BLT) webcast and presentation gave nothing more away that wasn't contained in the year end results. Despite being pressed on BLT’s expectations of commodity prices a number of times, Andrew Mackenzie elected to avoid answering. This has wider implications for those that believe it's down to the analysts to cover those assumptions (dig). Talk about horse and cart scenario, we expect to "do this" but we aren't going to tell the market the prices or assumptions we base these on. Although, notably, their assumptions by EMC estimates are "about the price" now. 

BLT are in a more privileged position than the likes of (Anto-f-ghastly) but not without risks. Not only are they on the lookout for a $6-$10B acquisition (my estimates), but their current gearing/leverage is better than most, albeit could be better (post further writedowns). BLT asserts they are determined to make projects workable/profitable at current prices, rather than the tone of "care and maintenance” other entities have suggested.

There appears to be some irregularities in the CAPEX and guidance given, a near $1.5B  difference in 6 months, which Andrew was pressed on not once but twice. Andrew wanted to take "this offline" to clarify the items. One wonders, whether these "offline discussions" will make it into the public domain, as it has some significance. From $12.5B to the quoted $11B today (for 2015) is concerning. As one analyst questioned, did they simply stop spending for 6 weeks. 

Whatever way the cat is skinned, BLT cannot maintain the dividend commitment without an improvement in cashflow via a) an increase in commodity prices, b) improvement in costs (that are entirely absent of an "all in associated costs basis,” but hey lets ignore this) c) reducing capex, including sustaining capex and finally, d) assuming the sustaining capital costs can be managed at circa $5/t they need to achieve an OPEX of $15/t. We'll be back to this in due course, because one suspects it's overly optimistic.

The elephant in the room went unanswered, namely taxation. Yes, this was ignored by pretty much everyone, taxation liability. BLT announced the woes of taxation only a week ago. If one was to break down the cost per employee, one has to wonder what the level of profitability is for Singapore worker compared to those in Australia. We are of course not suggesting the Australian Government are not considering this (‘onest gov).

Over to BLT, "almost 100 per cent of the profit from the sale of Australian commodities, from mine to customer, is subject to Australian tax – totalling $8.7 billion in taxes and royalties in Australia in the 2014 financial year." Really?...

BLT's figures were better than envisaged (EMC), but below consensus. BLT will have the same currency beneficiation that marginal producers will have to enable an improvement in OPEX costs, albeit with asset writedowns.

Regular readers will note the views here of the FX AUD trades, as the favoured currency play. Although it’s sensible to consider the implications of Saudi Riyal and the U$D peg. Those complacent marginal traders surely don't want another CHF debacle? Do they? 

There couldn't be more noise made about the "simplification premium" if they had tried. However, when pushed on it, one couldn't help but wonder if Andrew/BLT really meant was the ‘board’ has an inability to multitask (& perhaps some analysts). When pushed on it, to expand on the meaning of simplification, it didn't have the same dramatic effect that the term hoped to embrace. In essence, the board got rid of a short (Short32/South32: EMC call), to enable a focus on "three pillars." (EMC term now).

Without wanting to do a pseudo-analysis of the results, it comes down to earnings. These are guaranteed to fall for the next financial year, save for some act of god (Chinese mega-stimulus). BLT’s sensitivity to sustain operating profitability (P+ve cashflow); namely iron ore, oil and copper, doesn't bode well. 

There are challenges to the guidance given today, in light of the current outlook for “the three pillars” (as one cannot mention the other). Quite how the market expects BLT to perform, isn't so much a mystery, but more so reliance on a recovery of the three of the pillars. We’ll ignore the bauxite/Aluminium issues presented by Dupre Analytics, but the significance should at least acknowledged. Hat-tip on some significant work there and one suspect there’s “more to come on other Chinese entities.”

Oil's decline is likely to impact around $1.65B on BLT revenues. The recent decline in steel, metallurgical coal prices and iron ore, will undoubtedly impact. Whether BLT's guidance to their iron ore costs can be achieved is another story.

Rio Tinto's (RIO) is the preferred model, with RIO leading the charge in cash cost terms. Simply, one would be sensible to factor in a cash unit cost of $16.5/t for BLT, rather than the hoped for $15/t. 

The same for the read across on copper, where Rio advised that the second half is expected to be impacted by a decline in grades and water availability (Ref: to Escondida). Although absent from the BLT today and lacking further discussion. Should we stop looking for themes in accounts and just accept what we are told? 

Longer-term, today presents an opportunity assuming there's a telescope looking past the 3.5/7 year cycles and considering the super cycle per se. It was/is an opportunity for sentiment, aided in part by the Chinese Central Bank / PBOC meddling with the liquidity.

The move was an admittance of how bad things have got, with more to come. All expected, whilst avoiding shock and ore, an RRR decline of a further 100-150bp (EMC Estimates) is required. We note the auto-leasing implications, saving the likes of Daimler/VW.

Contrary to some expectations, the EMC has a target price/range of 1350 for BLT based on today's news. If they there are currency movements in the AUD (Aussie Dollar/expected) and the Chilean Peso (CLP/also expected) and USD interest rates, then BLT are set to benefit on an operating cost level basis. For the short-termism, it was rude not to have some "on the news."

If one wants a dividend at the expense of growth (CAPEX) this is the stock. Assuming BLT avoid biting the bullet and acquire an asset in the oil and gas sector, there's limited upside (circa 35%). 

More on ANTO in due course now their cash has gone. Thoughts for the evening - what are the implications for Caterpillar in the current climate. What are the implications for the Chinese “losing their life savings?” This has more weight that most analysts give credit for….analogies to a stalling plane going virtual were made on the morning call. 

Finally, thanks in part to Li, China (the people) want an explanation for their losses. With prices high, wages low, and China aiming for 7%, we have to acknowledge GDP (we’ll call it faux-growth) is now lower. This is evidenced in part by “cheap money” being thrown at the boil, rather than lance it. Come on the cheap money...whoops, not good for Wall Street…

Atb Fraser