Company Background of BHP Billiton - PowerPoint Presentation Example

?Slide BHP BILLITON, INC. Comprehensive Case Analysis Slide 2 Company Background BHP Billiton resulted from the merger between 2 mining companies, BHP and Billiton, in 2001 The firm is recognized as being among the industry leaders in major commodity busineses including aluminium, energy coal, metalllurgical coal, copper and other metals The company also has interests in oil, gas, liquefied natural gas, and diamonds It holds more than 100 operations in 25 countries, with US$140.4 billion capitalization BHP Billiton enjoys a dominant position in the metal and mining industry. The group has a global presence with more than 100 operations in 25 countries. The group's petroleum customer sector group (CSG) is a global oil and gas business with producing assets in six countries. The base metals CSG is one of the world's top producers of copper, silver, lead, and uranium, and a leading producer of zinc. Slide 3 - 5 Panda Pit, BPH Billiton Open Cut Mining, BHP Billiton Crushed product awaiting shipment, BHP Billiton Slide 6 Industry Analysis (Barrile, 2008) Macro-environment Analysis Political issues Operates in countries with different political systems Black Economic Empowerment legislation introduced labor inequalities legislation in South Africa where most of the mining operations are located BHP Billiton has to operate within a broad range of the political (and legal) systems. The global nature of their operations in countries such as Chile, Australia, China and the US means that it must mitigate its activities in light of varying political processes and legal systems. By way of example in South Africa, where the company has considerable mining operations, Black Economic Empowerment (BEE) legislation has been introduced to address inequalities created by past history, particularly the exclusion of black African people from participating in the country’s economy. The Company has been responding to the legislation through the implementation of their BEE Procurement Policy, which was introduced in 2003. Economic issues Unexpected swings in currency exchange rates Sudden fluctuations in world commodity (mineral) prices In other regions, the current and emerging climate change regulation could affect energy prices, and demand and margins for carbon intensive products. The compliance costs and in some cases remedial costs could increase the group's operational costs which in turn could affect its operating margins (Datamonitor, 2011). Consequently, these regulatory mechanisms could adversely impact the cost, production and financial performance of the group's operations. Furthermore, the interplay of demand and supply, as in other markets, is the key to price setting in commodity markets. In turn higher commodity prices can substantially add to BHP Billiton’s earnings which was the case at the end of the 2007 financial year (Barrile, 2008). Slide 7 Industry Analysis Macro-environment Analysis Social issues Affected by health, safety, environmental and community related issues BHP Billiton is affected by a range of social factors including health, safety, environmental and community related issues. The company uses the term ‘sustainability development’ to implement a broad program of policies, processes and activities that aim to make the company more responsive to social and community needs in the conduct of its businesses. Sustainability development is considered in two dimensions-the ‘business’ and ‘sustainability’ dimensions that come together to produce a more stable and valuable whole. (Barrile, 2008) Technological issues Innovation through the activities of employees such as engineers and scientists facilitate growth Focus on existing and new technologies in exploration and process engineering Science and technology are crucial factors that will bring continued success to the industry. Technological innovation through the activities of employees such as engineers and scientists facilitates growth and improved financial performance. The company focuses on understanding future trends and developing both existing and new technologies that can provide significant competitive advantage and major growth options for the different business units. Activities related to exploration and process engineering in production are two particular examples. (Barrile, 2008) Slide 8 Industry Analysis Macro-environment Analysis Legal issues Frequent litigations due to complaints by local civil and environmental groups due to pollution issues Divergent legal systems in different countries such as Chile, Australia, China, the US, and South Africa Each government has its own political regime as well as policies on natural resources and environmental control. Many governments have introduced regulatory changes to address the impacts of climate change. The Kyoto Protocol established a set of greenhouse gas emission targets for developed countries that have ratified the protocol. The European Union Emissions Trading System (EU ETS), which came into effect in 2005, has had an impact on greenhouse gas and energy-intensive businesses based in the EU. BHP Billiton's petroleum assets in the UK are currently subject to the EU ETS. To address climate change, the Australian Government has announced the introduction of national emissions trading scheme and a mandatory renewable energy target of 20% by the year 2020. Environmental issues The metals and mining industry that has serious concerns with Co2 emissions and water contamination Substantial use of energy during the conduct of business from mining operations to administration centres The mining industry is a major contributor to the greenhouse gas emissions and many processes related to the mining operations of BHP Billiton are of particular concern. Governments and organisations around the world are calling on individuals and businesses to take action to halt the increase in greenhouse gas emissions and therefore stabilise the rate of climate change that is evident in such events as prolonged droughts and increased frequency of other severe weather events such as floods and cyclones. (Barrile, 2008) Slide 9 Industry Analysis Porter’s Five Forces Model Internal Rivalry High, because of few rivals that operate at the same scale Threat from Substitutes Medium, because some materials are irreplaceable, while others have synthetic substitutes or more sustainable alternatives, depending on the use Slide 10 Industry Analysis Threat from New Entrants Low due to high entry barriers; large amount of capitalization and long-term knowledge are necessary to succeed Bargaining Power of Suppliers Medium due to limited sources of materials of the requisite specifications Bargaining Power of Buyers Medium due to presence of alternatives and presence of a few competitor firms Slide 11 Competitive Advantage BHP Billiton’s competitive advantage lies in its product and geographical diversification. It pursued three global growth strategies that had provided it its competitive advantage Acquisition of or mergers with existing businesses to develop new geographical and product markets Entering into joint venture arrangements with synergistic potentials Establishing operations in the firm’s own right in areas where opportunities arise Slide 12 SWOT Analysis (Datamonitor, 2011) Strengths Strong market position Global presence with more than 100 operations in 25 countries BHP Billiton has wide presence across various regions. The group generated 25.1% of the total revenues from China, its largest geographical market, in FY2010. North America accounted for 10.5%. Japan accounted for 10.1%, Australia accounted for 8.6%, South America accounted 3.8%, and the UK contributed 2.4%. Southern Africa accounted for 2.3% of the total revenues in FY2010. Other Asian countries accounted for 18.6% of the total revenues in FY2010, rest of Europe accounted for 16.2%, and rest of the world contributed to the remaining 2.4% of the total revenues. Diversified revenue stream Revenue stream in 9 business lines or CSGs Wide presence across various regions BHP Billiton's revenue stream is diversified in terms of business lines (referred to as CSG) and geographies. The group generates revenues through nine CSGs. In FY2010, the iron ore CSG accounted for 21.1.5% of the total revenues, base metals 19.7%, petroleum 16.6%, metallurgical coal accounted for 11.5%, and energy coal 8.1%. Aluminum accounted for 8.2% of the total revenues in FY2010, manganese accounted for 4.1%, and stainless steel materials 6.9% The diamonds and specialty products segment accounted for the remaining 2.4% of the revenues in FY2009. The remaining revenues were contributed by unallocated items that include group’s freight, transport, and logistics operations and certain closed operations. Customer-centric marketing operations in Singapore, the Hague and Antwerp The customer-centric marketing operations of BHP Billiton are centralized in Singapore, The Hague, and Antwerp. The Singapore office focuses on the Asian energy market, base metals, stainless steel materials, and carbon steelmaking raw materials.The Hague office focuses on aluminum, petroleum, energy marketing, and freight; while the Antwerp office serves diamonds customers globally. These three marketing offices incorporate all the functions encompassing product marketing and distribution from the point of production to final customer delivery. In addition, specialized marketers are located in 15 regional offices worldwide. Slide 13 SWOT Analysis Weaknesses Partnership constraints Some of its assets are managed by joint venture partners or by other companies with divergent business objectives, standards & controls BHP Billiton has tie ups with many companies and is involved in joint ventures. Some of its assets are controlled and managed by joint venture partners or by other companies. Some joint venture partners may have divergent business objectives which may impact business and financial results of BHP Billiton. Management of the company’s non-controlled assets may not comply with management and operating standards, controls, and procedures followed (including health, safety, and environment). Failure to adopt equivalent standards, controls, and procedures at these assets could lead to higher costs and reduced production. This can adversely impact the operating results of BHP Billiton. Litigation concerning groundwater contamination Due to historic mining operations in Arizona. A settlement has been reached where BHP and other firms contributed to remediation of the contamination. At the end of June 2010, BHP Billiton has provided $130 million for its anticipated share of the planned remediation work. These amounts are based on the provisional equal allocation of these costs among the three members of the Pinal Creek Group. Such litigations could result in huge payouts fro the company affecting its profits and also negatively impacting the brand image of BHP Billiton. Slide 14 SWOT Analysis Opportunities Acquisition of Chesapeake Energy’s shale assets These assets include 487,000 acres of leasehold and producing natural gas properties in Arkansas In February 2011, the company acquired all of Chesapeake Energy Corporation's (Chesapeake) interests in the Fayetteville Shale in the US, including the midstream pipeline system.The deal is worth $4.75 billion, which BHP Billiton expects to fund from the group's cash resources. This transaction makes BHP Billiton's entry into the US shale gas business. It provides access to a competitive, long-life resource basin. This deal also gives the company a competitive advantage as supports diversification by geography, customer, and product. Proposed joint venture with Adaro Energy for Indonesian coal project Undeveloped metallurgical and thermal coal resources estimated at 774 million tons BHP Billiton entered into binding agreements to create a new joint venture for its Indonesian Coal Project (ICP) with a subsidiary of Adaro Energy TBK (Adaro), in March 2010. Adaro acquired a 25% interest in the ICP joint venture. BHP Billiton holds the remaining 75%. The ICP covers seven coal contracts of work located in East and Central Kalimantan in Indonesia. The undeveloped metallurgical and thermal coal resources at ICP are estimated at 774 million tons. Completion of the transaction is subject to approvals from the Indonesian Government. Adaro is Indonesia's second largest thermal coal producer and has operations near the ICP. Through this joint venture, BHP Billiton can leverage the expertise of a strong local player for the successful development of the metallurgical coal interests in Indonesia. Expansion of coal and copper ore operations Increase from 4 million tons per annum (mtpa) to 24 mtpa BHP Billiton has been investing in the expansion of its coal and copper operations. In March 2011, the company approved a $400 million investment to expand the Hunter Valley energy coal operations in New South Wales, Australia. On the copper front, the company approved $554 million investment for the Escondida Ore Access (EOA) project in March 2011. These investments strengthen the company’s asset base as well as contribute in increased operations. This will in turn result in higher profits in mid to long term. Slide 15 SWOT Analysis Threats Reduction in demand from China Slowdown in Chinese economy can affect the prices of commodities. China accounts for 56% of global iron ore demand, 36% of copper demand, 35% of nickel, 39% of aluminum, 42% energy coal The global commodity market is driven by Chinese demand and a slowdown in the Chinese economy could adversely affect the prices of commodities. China is a significant consumer of commodities like iron ore and copper. In 2009, the country represented approximately 56% of the global seaborne iron ore demand. Furthermore, the country accounted for 36% of copper demand, 35% of nickel demand, 39% of aluminum demand, 42% per cent of energy coal demand, and 9% of oil demand worldwide. China's demand for these commodities has been driving global materials demand over the past decade. Environmental issues CO2 emissions, global warming, greenhouse effects BHP Billiton is one of the major producers of energy-related products such as energy coal, oil, gas, liquefied natural gas, and uranium. Energy is also a significant input in the group's mining and processing operations. The carbon dioxide (CO2) emissions from fossil fuel-based energy consumption contribute to global warming, greenhouse effects, and climate change. Intense competition Industry tends toward concentration BHP Billiton faces intense competition in the metals and mining industry. The metals and mining industry tends towards concentration. Within each segment, large multinational companies dominate. Moreover, this is a cyclical industry, which suggests that the current high growth rate is unlikely to be sustained. with a presence in over 25 countries across the world, BHP Billiton faces competition from several companies in different markets. For instance, the group faces competition from Newmont Mining, a US based gold producer, and Xstrata, a UK-based natural resources company with presence in coal, copper, zinc, alloys, and other businesses. The group also faces competition from UK-based ThyssenKrupp. Intense competition in the industry could lead to loss of market share and put pressure on the group's margins. Slide 16 Corporate Strategy Alignment BHP Billion attained strategic alignment through: Business Strategy - The firm developed added synergies from its various mergers and acquisitions Organizational Infrastructure – The company is organized around the Customer Sector Groups (CSG) that focus on customers rather than operations Above the CSGs are the Group Management Committee and the Board of Directors Slide 17 Corporate Strategy Alignment Firm resources - Development of equipment and technology Holdings in aluminium, base metals, diamonds, energy coal, metallurgical coal, iron ore, petroleum Distinctive competencies – Substantial engineering and scientific expertise Long-term development of business knowledge of mining and metals, and petroleum Slide 18 Liquidity & Solvency Ratios Slide 19 Asset Utilization Ratios Slide 20 Profitability Ratios Slide 21 Comparison with Competitors Slide 22 Z-score for predicting bankruptcy (Data for financials sourced from 10-K Report) Slide 23 5-Cs of Credit Character – Excellent reputation for repayment of loans Capacity – High capacity to absorb higher leverage Capital – Substantial equity capital Collateral – Tangible assets with real economic value Conditions – Improving prospects during period of recovery Slide 24 Recommendation The liquidity and solvency ratios of BHP shows a gradually falling capacity to meet their short-term obligations, although the company’s overall debt level remains satisfactory. Furthermore, earnings are rising and prospects are positive, and it has substantial tangible assets. It is recommended that BHP Billiton be included as a potential target company for conversion to Cap One Blue Chip Accounts. Read More