The market’s fixation of BHP Billiton Ltd.’s (BHP.AU) spinoff and the absence of a buyback at its results means it appears to have missed the value being created in its iron-ore unit, says UBS analyst Glyn Lawcock, who lifts his NPV estimate on the stock 10% to A$46.09. BHP’s Western Australia iron-ore division is now expected to expand to 290 million tons from 225 million tons for under US$50/ton of capex. It had previous been expected to lift capacity to 270 million for around US$100/ton, Lawcock says. “The reduction in capital intensity alone is a saving of around US$3 billion,” he says. “The inclusion of the lower capital intensity, lower unit costs and the additional 20 million tons per annum of future production has lifted our valuation for Western Australia Iron Ore from US$98 billion to US$110 billion.” UBS has a buy rating on the stock with a A$42.00 target.
My riposte using a $50 break even cost:
- 225mt at $90 per tonne is $9 billion profit
- 290mt at $80 per tonne is $8.7 billion profit
- 290mt at $70 per tonne is $5.8 billion profit
The margin squeeze is much more damaging than the volume growth. Once the risk is factored in, BHP becomes value trap.