BHP

Valuentum Economic Castleâ„¢ Rating Update

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Read: Keeping the Horse Before the Cart: Valuentum’s Economic Castle™ Rating The Economic Castle Focuses on the Magnitude of Economic Value Creation The Valuentum Economic Castle™ rating is an enhancement of the competitive advantage framework (commonly known as economic moat analysis) that has become widespread and ubiquitous within the investing world. Whereas an economic moat framework evaluates a firm on the basis of the sustainability and durability of its competitive advantages, Valuentum’s Economic Castle™ rating evaluates a firm on the basis of the firm’s future economic profit spread (return on invested capital less its weighted average cost of capital). The companies with the strongest Valuentum Economic Castle™ ratings are poised to generate the most economic value for shareholders in the … Read more

Coal Industry Update

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In July of last year, Valuentum offered its comprehensive outlook for the coal and railroad industries (click here). Since that time, Union Pacific (UNP), our favorite railroad idea, has surged to $185 per share from $155 per share, while some of our biggest concerns regarding the coal miners have come to fruition. James River Coal (JRCC), one of the most indebted miners in the industry, filed for Chapter 11 bankruptcy Tuesday, a process that will likely result in the complete eradication of shareholders’ equity as the firm restructures: James River intends to use the Chapter 11 process to continue implementing a comprehensive turnaround plan aimed at addressing its challenges in the changing coal mining industry. James River expects its mining … Read more

Iron Ore Prices Plunge

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Worries about the pace of China’s economic expansion are hurting prices for iron ore. According to data from the Steel Index Ltd, benchmark iron ore dropped more than 8% to $104.70 a dry ton March 10, falling the most since August 2009. Over the weekend, news revealed that Chinese exports dropped a surprisingly 18.1% in February, relative to expectations calling for a 7.5% increase. According to customs data released March 8, China’s imports of iron ore were 61.24 million metric tons in February, significantly below the 86.83 million tons registered in January. The news, while not shocking, wasn’t very pleasant. Still, we’re taking the recently-released February numbers with a grain of salt. Scares regarding the pace of China’s economic growth … Read more

BHP Billiton, Rio Tinto Expanding Cash Flow, Paying Down Debt

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On Tuesday, mining giant BHP Billiton (BHP) reported solid financial results for the December 2013 half year, with underlying EBIT advancing by 15%, to $12.4 billion, and underlying attributable profit jumping by 31%, to $7.8 billion. The company noted that substantial improvements in productivity and volume from lower-risk projects drove a material improvement in its underlying EBIT margin and underlying return on capital for the period. BHP Billiton’s net operating cash flow increased 65% and investing cash outflows dropped 25%, resulting in a $7.8 billion increase in free cash flow from the comparable six-month period last year. We like that both measures are moving in the correct direction to drive free cash flow expansion. The firm is wisely using its … Read more

Miners Continue to Be Cautious

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Though profit margins on iron ore operations are hefty, swings in commodity prices translate into large swings in equity prices as mid-cycle valuations are tweaked. Management teams within the mining space are well-aware of the boom-and-bust cycles of their business, and recent tactical moves indicate that constituents continue to be very cautious. We commented on Rio Tinto’s (RIO) and Vale’s (VALE) decision to cut spending, and recent news suggests that BHP (BHP) will also look to keep annual spending below $15 billion, a large cut from the $21.7 billion the firm spent in the previous fiscal year. The billions of dollars in reduced mining equipment spending doesn’t bode well for firms specializing in earth-moving equipment such as Caterpillar (CAT) and … Read more

Mining Capital Spending Still Expected to Fall

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On Monday, Brazilian miner Vale (VALE) rolled out its capital spending budget for 2014. The board approved a $14.8 billion capital spending plan, with the lion’s share allocated to project execution. The expected level will be the lowest since 2010, near the depths of spending levels in the Great Recession:  After peaking in 2011 at $18.0 billion, capital and R&D expenditures in 2014 will show a decline for the third year in a row. This reflects the greater focus on capital efficiency, which entails among other things pursuing shareholder value maximization through a smaller portfolio comprised of projects with a high risk-adjusted expected rate of return. This is evidenced by the fact that more than 80% of the 2014 budget … Read more

Caterpillar Misses on Both Top and Bottom Lines

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Caterpillar (CAT) has yet to breach the low end of our fair value estimate range, despite releasing a dismal third-quarter report Wednesday. Revenue dropped 18% on a year-over-year basis, while earnings per share tumbled more than 40% (both below consensus expectations). The firm also issued a revised 2013 outlook and now expects sales to be about $55 billion (was $56-$58 billion) with profit per share of $5.50 (was $6.50 per share in the middle of the range). As we outlined after the firm’s second-quarter report, released July 25: It appears that neither Cat nor its dealer network, which plans to reduce inventories even further, expects a robust recovery in demand anytime soon. Though cleaning out channel inventories by under-selling end-user … Read more

Rio Tinto Says Iron Ore Production Breaks Record; Iron Ore Prices Recover

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On Tuesday, mining giant Rio Tinto (click ticker for report: ) issued impressive third-quarter production results that revealed record production and shipments of Western Australia iron ore thanks to the opening of its Pilbara 290 port and rail expansion (ahead of schedule and significantly under budget). We think this good news has only been sweetened by the recent recovery in iron ore prices, following a near-term bottom in early June. It’s important to note, however, that iron ore prices remain in a defined downtrend, and while we view the recent pricing performance as positive, we’re not celebrating just yet. Image Source: http://www.indexmundi.com/commodities/?commodity=iron-ore&months=60 Still, fundamentals are starting to brighten up just a bit for the mining group. Economic performance in China … Read more

Assets Need to Go: Vale Edition

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Though it has already sold nearly $3 billion in assets since 2012, Brazilian mining giant Vale (click ticker for report: ) is mulling additional asset sales. CEO Murilo Ferreira admitted Tuesday that the firm was considering selling its 40% stake in aluminum producer Norsk Hydro ASA as well as some of its oil and gas assets. Vale joins rivals Rio Tinto (click ticker for report: ), Anglo American, and BHP (click ticker for report: ) in the effort to focus on the best operations while selling off underperforming assets. As we’ve previously noted, this situation becomes difficult when every party is also interested in selling weak assets, as would-be buyers can seek out bargains and demand hefty discounts. The fundamental reasoning … Read more

Air Quality Standards Take Aim at Coal

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After competing with an abundance of lower-priced, cleaner natural gas, coal miners (KOL) may now have to deal with more demand headwinds as governments aim to reduce coal burning. The US Expectations are already for as much as 27 gigawatts’ worth of coal generation (about 8.5% of the US coal fleet) to retire by 2016. This percentage could rise to nearly 17% (one-sixth) by 2020, according to the Energy Information Administration. In addition to the expected retirements, the Environmental Protection Agency (EPA) plans to block all new coal-fired plants unless the construction of these plants coincides with expensive technology that captures greenhouse gas emissions. Image Source: Energy Information Administration Though the EPA forecasts that no traditional coal-fired power plants (1) … Read more