Goldman Sachs reckons you should buy BHP. Here’s why:
Diversification – BHP has exposure to a combination of early and late cycle commodities and are extremely well positioned to weather the volatility. High quality asset base which provides it with long-term growth options
Oil Division – We continue to believe that BHP’s key differentiator is its oil division, which provides robust EBITDA generation (from its growing US onshore business and GoM assets) on our oil price forecasts.
Price target $41 – Craig Sainsbury’s current price target is $41. Given recent weakness this is now implying 32% upside at current prices & thus he has a BUY rating.
Worst case NPV – On our recent worst case NPV scenario analysis by Craig Sainsbury – BHP worst case (or scorched earth) NPV is $29.25 v current price $31.34
What BHP share price is implying – At current prices BHP is implying Copper US 317c/lb, Iron Ore US$80/t, Coking coal US$188/t, Thermal coal US$ 84/t, Brent US$78/bbl
Yield – market wants a yield….BHP is approaching 4.5% yield where it has historically bounced over the last 3 years (see chart below). Given BHP’s progressive dividend policy this is highly unlikely to be cut. This is not something we can say about other miners.
Cost Savings are happening and tangible – BHP at the recent result flagged that it has achieved an annualized run-rate of savings of US$1.9 bn of controllable cash costs.
BHP over the last 3 years share price has bounced as we approach a 4.5% yield… BHP is one company we are very confident won’t cut its dividend…can’t say that about all miners.
I have no great issue with this call. BHP is clearly the long term winner in the forthcoming Australian mining shakeout with greater diversity, better management and exposure to long term energy trends. As well, at some point in the mining bust the dollar will fall and the winners will begin to rise. My main issue is timing. In my view the current BHP share price is NOT discounting a sustained $80 iron ore price. And the GS view on China is very happy:
We have downgraded Chinese growth – but in realty this is already where many have been saying in the last few weeks. China, GDP / Downgrade – We have revised down our 2013 GDP forecast to 7.8%, from 8.2% previously, on account of softer-than-expected Q1 GDP. But more importantly – we keep our 2014 growth forecast unchanged at 8.4 on further improvement in exports and domestic demand. The downside surprise in Q1 stemmed from weaker-than-expected consumption.
Maybe for GS but for the rest of us the downside surprise as in fixed asset investment growth. If China is going to grow at 8.4% next year then the timing is spot on for this call. However, if China is going to keep slowing, towards 7% next year, then this is a real dud, even if it will put a rocket under the short term price recovery that began late last week.
