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June 30, 2010 Dear Friend,
We believe our
financial models of BHP are particularly cautious in two
ways. First, we model a 2% pretax return on cash
balances that we estimate accumulate to $71 billion by
June 2016. Second, we estimate 20% declines in June
2012 and again in June 2013 fiscal year iron ore prices
to about $80 per tonne in deference to global capacity
additions. Our revised earnings estimates included cuts
in petroleum volumes owing to down time to 5 Gulf of
Mexico offshore platforms and cuts to copper and
aluminum near-term price estimates.
BHP Billiton trades
at < half of our $130 per ADR earnings estimates and
about 7.5 times estimated June 2011 earnings. We regard
this as a particularly attractive opportunity to buy a
large, liquid company with dividend yield, strong
finances and many "quality" attributes.
Further, most of the
other "Big Six" diversified mines or nonferrous base
metals miners appear similarly undervalued. Investors
anticipate a global decline in economic activity and
increases in taxation. We estimated in our May 21,
2010 comparision of the "Big Six" diversified mines
that their shares collectively anticipated $2.50 copper,
$60 iron ore (1/3 cut rather than 35% announced May 29th
hike) and escalation to 50% from 32% average income tax
rates, which we deem as unlikely scenarios.
Faithfully,
John C. Tumazos, CFA
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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