Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

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Equity Bottom-Up

<ul><li>BHP Billiton has a number of the world's largest mines.</li><li>Key mining commodities are iron ore, coking coal and copper. In addition, the company has meaningful oil exposure with large bets on U.S. onshore shale gas and oil made in the past few years, in addition to a portfolio of conventional and liquefied natural gas, or LNG, assets.</li><li>The iron ore mines in particular are at the low end of the industry cash cost curve, however over-investment during the peaks of the China boom, when capital costs were very high relative to historical standards, has rendered any operating cost advantage moot.</li><li>After adding back the not inconsiderable write-downs, BHP&rsquo;s invested capital base has nearly quadrupled in the decade ended 2015.</li><li>In the five years ended fiscal 2012, BHP Billiton's return on invested capital averaged 25%, but those heady days are gone reflecting the weaker external environment and balance sheet obesity from boom time spending.</li><li>Considerable investment during the boom, with no commensurate uplift in earnings, has significantly diluted returns to the point where we think excess returns are unlikely in future.</li></ul>Analyst: Mathew Hodge

BHP Billiton has a number of the world's largest mines.Key mining commodities are iron ore, coking coal and copper. In addition, the company has meaningful oil exposure with large bets on U.S. onshore shale gas and oil made in the past few years, in addition to a portfolio of conventional and liquefied natural gas, or LNG, assets.The iron ore mines in particular are at the low end of the industry cash cost curve, however over-investment during the peaks of the China boom, when capital costs were very high relative to historical standards, has rendered any operating cost advantage moot.After adding back the not inconsiderable write-downs, BHP&rsquo;s invested capital base has nearly quadrupled in the decade ended 2015.In the five years ended fiscal 2012, BHP Billiton's return on invested capital averaged 25%, but those heady days are gone reflecting the weaker external environment and balance sheet obesity from boom time spending.Considerable investment during the boom, with no commensurate uplift in earnings, has significantly diluted returns to the point where we think excess returns are unlikely in future.Analyst: Mathew Hodge

BHP Billiton's Heavy Investment Through the China Boom Has Diluted Returns and Destroyed the Moat.

Global Special Situations

Charles Nave

Event-Driven

Since the Samarco Disaster on 5th November, the market has slashed&nbsp;a whopping A$16.8b from the market cap of BHP Billiton. &nbsp;That's 14% of it's market cap.In an ex-disaster scenario, BHP should have dropped by around 2.3% (in line with RIO), meaning the market is implying that the Samarco disaster has cost BHP around A$12.6b.Even under the most excessive of circumstances (never regaining the mining license, valuing Samarco at full capacity over its lifetime and paying compensation well in excess of estimates), this is a bridge too far.Would look to +BHP vs -RIO at current levels.

Since the Samarco Disaster on 5th November, the market has slashed&nbsp;a whopping A$16.8b from the market cap of BHP Billiton. &nbsp;That's 14% of it's market cap.In an ex-disaster scenario, BHP should have dropped by around 2.3% (in line with RIO), meaning the market is implying that the Samarco disaster has cost BHP around A$12.6b.Even under the most excessive of circumstances (never regaining the mining license, valuing Samarco at full capacity over its lifetime and paying compensation well in excess of estimates), this is a bridge too far.Would look to +BHP vs -RIO at current levels.

BHP Billiton (BHP AU):  Market Has Overreacted to the Samarco Disaster

Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Macroeconomics

<div>In a speech today, Christopher Kent, Assistant Governor, flagged that the RBA expects the speed of China's economic development to ease further, and for the composition of growth to evolve, reflecting four key developments.</div><ul>
<li>Slower growth of the working age population (which is largely baked in).</li>
<li>Urbanisation to continue albeit at a more gradual pace.</li>
<li>The still large productivity gap between China and advanced economies to narrow further, the speed of which is subject to the implementation of…</li>
</ul>

In a speech today, Christopher Kent, Assistant Governor, flagged that the RBA expects the speed of China's economic development to ease further, and for the composition of growth to evolve, reflecting four key developments.
Slower growth of the working age population (which is largely baked in).
Urbanisation to continue albeit at a more gradual pace.
The still large productivity gap between China and advanced economies to narrow further, the speed of which is subject to the implementation of…


Failure of a tailings dam and damage to another at the 50%-&nbsp;owned Samarco iron ore mine in Brazil, in joint venture with&nbsp;Vale, is a disaster.The environmental mess and loss of life&nbsp;dents investor confidence at a time when sentiment for BHP&nbsp;Billiton is fragile as a result of falling commodity prices.Managing director Andrew Mackenzie has responded&nbsp;admirably in trying circumstances, promptly on the ground,&nbsp;offering sincere condolences and pledging BHP's full&nbsp;support in the recovery.That said, in no way do we put a&nbsp;positive spin on the event for BHP.Analysts: Mathew Hodge &amp; Mark Taylor

Failure of a tailings dam and damage to another at the 50%-&nbsp;owned Samarco iron ore mine in Brazil, in joint venture with&nbsp;Vale, is a disaster.The environmental mess and loss of life&nbsp;dents investor confidence at a time when sentiment for BHP&nbsp;Billiton is fragile as a result of falling commodity prices.Managing director Andrew Mackenzie has responded&nbsp;admirably in trying circumstances, promptly on the ground,&nbsp;offering sincere condolences and pledging BHP's full&nbsp;support in the recovery.That said, in no way do we put a&nbsp;positive spin on the event for BHP.Analysts: Mathew Hodge &amp; Mark Taylor

BHP Billiton's Exposure to Samarco Tailings Disaster

Global Asset Allocation, Politics & Governance, Ecstrat

John-Paul Smith

Global Asset Allocation, Politics & Governance

Ecstrat

Ecstrat is a consultancy advising on asset allocation between global equity markets, with a focus on the intersection of governments, geopolitics, governance and markets.
 
Over the past few years and more especially since the Great Financial Crisis (GFC), investors have become more focused on short-term market movements and real-time returns and have consequently neglected the analysis of the underlying structural themes that underpin longer term performance.
​
More specifically we believe that the evolution of governance-based relationships between investors, controlling shareholders, labour and the state is one of the primary determinants of both relative and absolute performance between individual equity markets.
 
We will endeavour to provide investors with some of the context surrounding governance-related issues which encompass many different disciplines including history, economics and political science, as well as the financial metrics which are the most obvious manifestation of the structural characteristics of each market.
 
We will pay particular attention to the shifts and potential inflection points for governance in individual markets as these are often the best lead indicators for both economic and market performance.

Cross Asset Strategy

Mark and JP once again highlight the fault lines that run through what they consider to be the most vulnerable part of the listed Chinese corporate sector, namely the industrial and materials companies which are the most symptomatic of the broader economy.Whilst there are a number of indications that the rate of economic growth may pick up a little over the short term (property sales, land sales, consumption incentives, fiscal policy), these sectors are indicative of a deep malaise at the heart of the economy.We are especially concerned about the blow out in working capital and the ongoing deterioration in the efficacy of credit growth.&nbsp;

Mark and JP once again highlight the fault lines that run through what they consider to be the most vulnerable part of the listed Chinese corporate sector, namely the industrial and materials companies which are the most symptomatic of the broader economy.Whilst there are a number of indications that the rate of economic growth may pick up a little over the short term (property sales, land sales, consumption incentives, fiscal policy), these sectors are indicative of a deep malaise at the heart of the economy.We are especially concerned about the blow out in working capital and the ongoing deterioration in the efficacy of credit growth.&nbsp;

China: Short-term stabilization possible but underlying fault lines remain

Australia

BHP Group Ltd operates as an international resources company. The Company offers mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel, and copper concentrate, as well as petroleum exploration, production, and refining. BHP Group serves customers worldwide.

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BHP Group Ltd (BHP AU)

BHP Billiton's Heavy Investment Through the China Boom Has Diluted Returns and Destroyed the Moat.

BHP Billiton has a number of the world's largest mines. Key mining commodities are iron ore, coking coal and copper. In addition, the company has...

Morningstar, Inc.

BHP Billiton (BHP AU): Market Has Overreacted to the Samarco Disaster

Since the Samarco Disaster on 5th November, the market has slashed a whopping A$16.8b from the market cap of BHP Billiton. That's 14% of it's...

Charles Nave

RBA Downbeat on Commodity Price Outlook

In a speech today, Christopher Kent, Assistant Governor, flagged that the RBA expects the speed of China's economic development to ease further,...

Sam Ferraro

BHP Billiton's Exposure to Samarco Tailings Disaster

Failure of a tailings dam and damage to another at the 50%- owned Samarco iron ore mine in Brazil, in joint venture with Vale, is a disaster.The...

Morningstar, Inc.

China: Short-term stabilization possible but underlying fault lines remain

Mark and JP once again highlight the fault lines that run through what they consider to be the most vulnerable part of the listed Chinese corporate...

John-Paul Smith

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