BHP Billiton On-track despite maintenance headwinds

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1 AUSTRALIA BHP AU/BLT LN Outperform Price (at 10:03, 17 Oct GMT)A$33.45/ Volatility index Low 12month target A$ month TSR % Valuation A$ DCF (WACC 9.0%, beta 0.8, ERP 5.0%, RFR 6.0%, TGR 3.0%) GICS sector Materials 30day avg turnover A$m Combined market cap US$m 178,419 Number shares on issue m 3,224 Investment fundamentals Year end 30 Jun A E E E Revenue m 72,226 69,739 77,697 83,063 EBIT m 27,239 21,415 26,085 27,127 Reported profit m 15,417 11,834 14,705 15,249 Adjusted profit m 17,117 11,834 14,705 15,249 Gross cashflow m 25,482 20,886 24,282 26,009 CFPS PGCFPS x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % ROA % EV/EBITDA x Net debt/equity % BHP AU vs ASX 100, & rec history Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, October (all figures in USD unless noted) 17 October Ontrack despite maintenance headwinds Event BHP reported 1QFY13 production results. Impact Maintenance takes its toll: On a proportionate basis, the miss in Copper was the most significant (driven by maintenance at Escondida, Olympic Dam and Spence, all of which are expected to bounce next quarter). Elsewhere, facilities downtime (or the gradual recovery from past interruptions) impacted volumes at WAIO, GoM, Met Coal, and Diamonds. As a result, we forecast average production across the commodity groups to rise ~5% in the December quarter, despite seasonally lower Bass Gas production. All major production guidance reiterated: Management confirmed all existing production guidance for FY13, namely 5% growth in WAIO (to ~181mt), a 20% bounce in Escondida volumes (to ~609kt) and an 8% jump in volumes to 240mboe. Of these, the guidance would appear most comfortable while delivering WAIO guidance will presumably need a strong December quarter ahead of cyclone season. 2% below our forecasts but guidance reiterated: Total production of 39.8mt slightly missed our forecasts, whilst Pilbara sales were 2% below our estimate reflecting larger than expected tiein interruptions associated with the new shiploaders at Nelson Point. As a result, we now expect a 7% jump in volumes this quarter to meet guidance. Copper 8% below our forecasts due largely to facilities downtime: Production of 273.9kt was hampered by maintenance across the portfolio, however with this work now complete, we expect a 4% bounce in December quarter volumes and 10% growth in overall copper volumes this year to 1.2mt. 3% ahead of expectations with guidance reiterated: Total production of 61.25mboe jumped 9% q/q supported by the highest NWS and Bass Strait production in almost 2 years. Fullyear guidance of 240mboe appears comfortable on current run rates (even allowing for some seasonal gas production) given the apparent upside potential in the GoM and the infrastructure constrained US onshore liquids. What s more, should Henry Hub prices continue rising, activity in the dry shales could also contribute to this year s volumes. As a result, our forecast of 245mboe sits above guidance. Earnings and target price revision Lowering FY13E earnings by 0.7%: This slight cut reflects the weaker Copper result due largely to the unanticipated extent of Escondida downtime. Price catalyst 12month price target: A$39.00 based on a DCF methodology. Catalyst: BHP is due to hold its Australian AGM on 29th November Action and recommendation Maintain Outperform rating and A$39/sh price target: Although on balance the 1Q13 production performance was slightly below our forecasts, with all key production guidance reiterated (,, Copper) this appears to be more of a timing issue with maintenance downtime taking a heavy toll during the period. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 Analysis Fig 1 Attributable production Commodity units 1QFY13 q/q vs. Mac Comments kt 39,772 3% 2% planned shutdown hit WAIO volumes bounce expected this quarter ahead of cyclone season mboe % 3% Mad Dog & Atlantis ramp up faster than expected comfortably ontrack for FY guidance Copper kt % 8% although apparently flagged on field trip, we re surprised by the extent of Escondida downtime Met coal kt 8,938 10% 16% although production was strong, supply chain restocking meant sales were 9% lower Energy coal kt 19,607 6% 0% q/q increase due to rampup of RX1 and the resumption of longwall mining at San Juan Manganese ore kt 2,146 4% 7% 20% jump in Australian production drove the q/q growth due to improved plant availability Nickel kt 37 13% 4% production fell as nickel matte stockpiled ahead of planned maintenance at Kalgoorlie smelter Diamonds kc % 24% unscheduled maintenance at EKATI hit volumes but lower grades also expected kt 270 9% 3% q/q increase from Hillside capacity coming back online, but more slowly than we expected Alumina kt 1,170 13% 7% Worsley ramp up contributing faster than we expected Source: Company data, Macquarie Research, October Fig 2: At the commodity level, there were some meaningful divergences from our forecasts 15% 10% 5% 0% 5% 10% 15% 20% Fig 3: but when weighted by each division s expected contribution to FY13 EBIT, the aggregate result was ~1.3% below our forecasts 1.0% 0.5% 0.0% 0.5% 1.0% 1.5% 25% 2.0% Met coal Alumina Manganese ore Energy coal Average Nickel Copper Diamonds Met coal Manganese ore Nickel Energy coal Diamonds Alumina Wgt Ave Copper Source: Company data, Macquarie Research, October Source: Company data, Macquarie Research, October 2% below our forecasts but guidance reiterated: Total production of 39.8mt slightly missed our forecasts, whilst Pilbara sales were 2% below our estimate reflecting larger than expected tiein interruptions associated with the new shiploaders at Nelson Point. Despite maintenance downtime during the last quarter, BHP reiterated guidance of 5% growth in WAIO volumes this year (to ~181mt). As a result, we expect a 7% jump in volumes next quarter before cyclone season sets in (BHP expects minimal production disruptions associated with the tiein of the 5 th car dumper which is expected online by yearend). 3% ahead of expectations with guidance reiterated: Total production of 61.25mboe jumped 9% q/q and was slightly ahead of our forecasts supported by strong contributions from the Atlantis and Mad Dog restarts along with the highest North West Shelf and Bass Strait production in almost 2 years. Within the US onshore business, overall production of 24.3mboe fell slightly on the preceding quarter despite the subsequent pick up in Henry Hub gas prices reflecting the lead time required to drill and tiein new wells. Instead, reflecting management s focus on the wetter shales, the share of onshore US dry gas production has fallen from over 92% to 84% while the proportion of crude and NGL s has doubled over the past 12 months. 17 October 2

3 In a departure from previous quarters, there was no mention of successful appraisal drilling in the Permian with BHP instead confirming existing guidance of over 60 wells to be drilled in the in the field this year (which despite the lack of news flow implies at least double the run rate posted in the last two quarters). Fullyear guidance of 240mboe was reiterated which would appear comfortable on current run rates (even allowing for the seasonal nature of some Australian gas production) along with further upside expected from Mad Dog, Atlantis and the US onshore liquids which is currently infrastructure constrained. What s more, should Henry Hub prices continue rising, activity in the dry shales is likely to pick up which could also contribute to this year s volumes. As a result, our forecast of 245mboe sits slightly above guidance. Copper 8% below our forecasts due largely to facilities downtime: Total copper production of 273.9kt was down 12% q/q and 8% below our forecasts driven by maintenancerelated downtime at Escondida, Spence and Olympic Dam. However, with this work now complete, management expects an uplift from all of these mines going forward and consequently, despite significant further downtime anticipated at Olympic Dam, we expect a 4% bounce in December quarter volumes. Management remains comfortable with a 20% jump in Escondida production this year which more than makes up for Olympic Dam and Spence performing below name plate capacity, and as a result we are forecasting 10% growth in overall copper volumes this year to 1.2mt. Elsewhere, Antamina had another strong quarter (above name plate implying expansion potential in due course) with the Pinto Valley restart expected by the end of the year. Met coal bouncing back after BMA industrial disputes: Met coal production of 8.9mt was 10% higher than the previous quarter and 16% above our expectations as production ramped up faster than anticipated following the industrial disputes that have hampered previous period production. Indeed, we were expecting a significant rampup period (612 months) given deferrals in removal of overburden and other scheduled activities. Sales were lower than production as the supply chain was restocked in the wake of the recent BMA industrial disputes. Once completed, this restock should see BMA operations return to full capacity by yearend (assuming the ballot result is favourable). With the deferral of Peak Downs, the Caval Ridge capex budget has been lowered to U$1.87bn from U$2.1bn (BHP share). This means the Peak Downs expansion would have added ~45% of incremental capacity to the overall project by only increasing the cost by ~12% perhaps suggesting management saw higher anticipated unit operating costs (certainly not top quartile) and hence marginal profitability. 17 October 3

4 Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Macquarie Private Wealth 1QFY13 operational update and outlook IRON ORE AND PETROLEUM IRON ORE Stable production despite tiein activities; Pilbara guidance reiterated %FY13 EBIT Production (mt) QoQ% YoY% % Vs. Mac 1Q FY13 46% % 1% 2% WA Iron Ore production fell 3% QoQ, whilst the all important sales figure and true reflection of the Pilbara system, falling 2% QoQ to 43.4mt (100% basis) due to tiein activities associated with the installation of two shiploaders at Nelson Point. Samarco sales volumes fell 6% QoQ despite all three furnaces continuing to operate at full capacity. WAIO production guidance for FY13 of a 5% rise in volumes to ~181mt (100% basis) was reiterated. We note the potential for disruptions to production in 2QFY13 due to it being the beginning of cyclone season in the Pilbara. The expansion of Inner Harbour installed capacity to 220mtpa is set to be complete by CY12 end. First pellet production from the fourth pellet plant (+8.3mtpa) at Samarco is expected in 1HCY MT Pilbara Samarco MT Pilbara Samarco PETROLEUM Atlantis and Mad Dog are back %FY13 EBIT Production (MBOE) QoQ% YoY% % Vs. Mac 1Q FY13 21% % 19% 3% Total volumes rose 9% QoQ due to the restarts of Atlantis and Mad Dog as well as a strong contribution from the North West Shelf. Due to the GoM restarts, higher margin liquids production rose 17% QoQ outpacing overall quarterly volume growth. Onshore US liquids production hit a record of 3.9mboe in the quarter and overall volumes for the division are set to rise through FY13 as drilling currently runs ahead of infrastructure development. Guidance for FY13 has been reiterated at 240mboe and includes a 15% rise in the contribution of liquids. We currenty estimate that BHP will produce ~245mboe in FY13, with a ~103mboe contribution from Onshore US. Kipper has now be completed, with first production pending the resolvement of mercury. MBOE Bass Strait North West Shelf Pyrenees Atlantis 70.0 Mad Dog Shenzi Onshore US Other MBOE Bass Strait Pyrenees Mad Dog Other North West Shelf Atlantis Shenzi Onshore US Source:, Macquarie Research, October 17 October 4

5 Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Mar07 Jun07 Sep07 Dec07 Mar08 Jun08 Sep08 Dec08 Mar09 Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10 Mar11 Jun11 Sep11 Macquarie Private Wealth 1QFY13 operational update and outlook COPPER AND MET COAL BASE METALS (COPPER) Maintenance hits quarterly production at Escondida and Spence %FY13 EBIT Production (kt) QoQ% YoY% % Vs. Mac 1Q FY13 23% % 24% 7% Mined copper production fell 12% QoQ due to planned maintenance outages at Escondida (13% QoQ) and Spence ( 20% QoQ). There were also smelter throughput issues at Olympic Dam which constrained cathode production. The only site to show positive QoQ production was Antamina (+15% QoQ), where the concentrator expansion rampup to 130ktpd was so successful that it operated above nominal capacity rates for the whole quarter (~135ktpd on our numbers). Escondida guidance of a 20% rise in volumes for FY13 was reiterated (~1.06mt on a 100% basis). The smelter at OD is set to be closed for a period of 27days in the Dec quarter, however cathode production should improve on the current period's performance. The rampup of Pinto Valley to 60ktpa should begin late /early. KT Escondida Antamina Pampa Norte Olympic Dam 1,600 KT Escondida Antamina Pampa Norte Olympic Dam , ,200 1, METALLURGICAL COAL QLD production volumes up 20% QoQ, but sales growth subdued %FY13 EBIT Production (mt) QoQ% YoY% % Vs. Mac 1Q FY13 4% % 4% 16% Total met coal production was up 10% QoQ, driven by a 20% QoQ rise in QLD coal volumes despite the decision to cease openpit operations at Gregory. Although the siginficant rise in production (the system was operating at 80% of nominal capacity), sales were up only 4% QoQ to 5.8mt with ~1.1mt of inventory build in the quarter. Production in Illawarra was down 15% QoQ due a longwall move at Appin during the quarter. With no siginifcant work stoppages since July, a ballot on the BMA Enterprise Agreement is to be held in the next 2 weeks. If successful, there is significant potential for QLD coal to operate at full capacity rates by year end. A long wall move is planned towards the end of 2QFY13 at Dendrobium in the Illawarra. BHP has reduced capex guidance for Caval Ridge to US$1.87bn (BHP share) from US$2.1bn previously due to the deferral of Peak Downs (2.5mtpa, 100%) MT Queensland Illawarra MT Queensland Illawarra Source:, Macquarie Research, October 17 October 5

6 Summary Share price: A$ Target price: A$ Profit & Loss A A E E E Divisional EBIT A A E E E Turnover US$m 52,798 71,739 72,226 69,739 77,697 US$m 4,573 6,330 6,349 5,038 7,072 Consolidated revenue US$m 52,798 71,739 72,226 69,739 77,697 US$m Operating Costs US$m 28,813 35,177 39,386 41,846 44,819 Base Metals US$m 4,632 6,790 3,965 4,862 4,926 EBITDA US$m 23,985 36,562 32,840 27,893 32,878 Carbon steel materials US$m 8,766 16,695 16,006 11,209 12,818 Depreciation & amortisation US$m 4,794 5,113 6,507 7,182 7,607 US$m 6,001 13,328 14,201 10,039 10,804 + Share of JCE profit US$m Manganese US$m Other income US$m Met coal US$m 2,053 2,670 1, ,512 EBIT US$m 19,719 31,980 27,239 21,415 26,085 Diamonds & Specials US$m Net interest payable US$m ,833 2,354 Energy Coal US$m 730 1,129 1,227 1,498 1,538 + Exceptionals US$m , Stainless Steel Materials US$m Pretax profit US$m 19,572 31,255 23,023 19,582 23,731 G & A (plus other income) US$m Tax expense US$m 6,563 7,309 7,491 7,612 8,791 Underlying EBIT US$m 19,719 31,980 27,239 21,415 26,085 Minorities US$m Reported Net Profit US$m 12,722 23,648 15,417 11,834 14,705 Production A A E E E Exceptional items (post tax) US$m 253 1,964 1, kt 1,241 1,246 1,153 1,190 1,271 Adjusted Net Profit US$m 12,469 21,684 17,117 11,834 14,705 Alumina kt 3,841 4,010 4,152 4,906 5,259 Profit growth % 16.3% 73.9% 21.1% 30.9% 24.3% Copper kt 1,075 1,139 1,094 1,200 1,328 Effective tax rate % 31% 32% 34% 35% 35% Nickel kt Iron Ore (incl. Samarco pellets) mt EPS adjusted US ps Coking Coal mt EPS growth (adjusted) % 16% 75% 18% 31% 24% Thermal Coal mt DPS US ps Oil & Gas mboe Diamonds mct Underlying EBITDA US$m 24,513 37,093 33,746 28,596 33,692 Uranium t 2,279 4,045 3,885 4,170 4,170 Underlying EBIT US$m 19,719 31,980 27,239 21,415 26,085 Key Assumptions A A E E E Cash Flow A A E E E AUD/USD exchange rate A$/US$ Net cashflow from operations US$m 23,276 38,062 34,876 29,538 34,343 US /lb Dividends from JV & Associates US$m Copper US /lb Net interest US$m ,104 2,554 Nickel US /lb Tax paid US$m 4,955 6,558 8,327 5,523 8,682 Fine iron ore US /mtu Operating Cashflow US$m 17,920 31,061 25,986 21,912 23,108 Lump iron ore US /mtu Asset sales / (purchases) US$m 359 5,058 12,801 2,110 0 Coking coal US$/t Capital expenditure US$m 9,323 11,147 18,385 19,333 16,447 Thermal coal US$/t Exploration & other US$m 1,333 1,240 2,452 2,500 2,500 WTI oil US$/t Investing Cash Flow US$m 11,015 17,445 33,638 19,723 18,947 Uranium (received) US$/t Dividends paid US$m 4,618 5,054 5,877 6,173 6,599 Debt drawdown / (repayment) US$m ,827 6,400 0 Equity financing & other US$m , Financing Cash Flow US$m 5,307 16,018 2, ,599 Cash Flow PreFunding US$m 2,287 8,562 13,529 3,984 2,438 Net Cash Flow US$m 1,598 2,402 5,143 2,416 2,438 Free Cash Flow US$m 6,905 13,616 7,652 2,189 4,161 Balance Sheet A A E E E Cash US$m 12,456 10,084 4,781 7,197 4,759 Current assets US$m 12,678 15,196 15,670 15,670 15,670 Fixed assets US$m 55,576 68,468 95, , ,139 Other assets US$m 8,142 9,143 13,575 13,575 13,575 Total assets US$m 88, , , , ,143 Current liabilities US$m 13,042 19,733 22,034 22,034 22,034 Total liabilities US$m 39,523 45,136 62,188 70,400 70,257 Minority interests US$m ,215 1,215 1,215 Shareholder equity US$m 48,525 56,762 65,870 71,531 79,637 Total debt US$m 15,764 15,907 28,330 34,726 34,724 Net debt US$m 3,308 5,823 23,549 27,529 29,965 Working capital US$m 12,092 5,547 1, ,605 Average diluted shares m 5,565 5,516 5,322 5,322 5,322 Ratio analysis A A E E E Net Debt / Equity % 7% 10% 35% 38% 37% Net Debt / (Net debt + Equity) % 6% 9% 26% 27% 27% EBIT Net Interest Cover x Net interest cover x Payout Ratio % 39% 26% 35% 54% 46% NPV Breakdown Diamonds & Specialty Energy Stainless Products Coal Steel 2% 6% Materials 2% Manganes e 1% 0% EBITDA Margin % 45% 51% 45% 40% 42% 20% Underlying EBITDA Margin % 46% 52% 47% 41% 43% A E EBIT Margin % 37% 45% 38% 31% 34% EV/EBITDA (fixed debt) x % Nominal $USm $US/sh $A/sh /sh EV/EBITDA (prospective) x , , GCFPS US ps Base Metals 30, PGCFPS x , FCF Yield % 3.9% 7.6% 4.3% 1.2% 2.3% Metcoal 11, ROE (NPAT / Equity) % 26% 38% 26% 17% 18% Manganese 1, ROCE (EBIT / Debt + Equity) % 30% 43% 29% 20% 23% Diamonds & Specialty Products 3, EVM x Energy Coal 12, Stainless Steel Materials 4, PE x Group & Unallocated 3, Adjusted AUD PE x Net Debt (incl Assoc Net Debt) 20, Adjusted GBP PE x NPV 182, Dividend yield AUD % 2.9% 3.1% 3.3% 3.4% 3.7% NPV (spot fx conversion) Dividend yield GBP % 3.4% 3.2% 3.6% 3.7% 3.9% Premium/(Discount) to NPV (@ long run AUD:USD): 20.0% 4.4% Franking % 100% 100% 100% 100% 100% Market Capitalisation ($USm): 178,419 US$m 40,000 30,000 20,000 10,000 0 Metcoal 5% 38% Underlying EBITDA ROCE (EBIT / Debt + Equity) A A E E E 29% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2% Base Metals 15% A A E E E Met coal Energy Coal Base Metals 100% 80% 60% 40% 20% PE x PGCFPS x EBIT Contribution (US$m) Manganese Stainless Steel Materials Diamonds & Specials Prices as at 17 October 9pm AEST Source:, IRESS, Macquarie Research, October 17 October 6

7 Important disclosures: Recommendation definitions Macquarie Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from 10% to +10% Underperform expected return <10% Macquarie First South South Africa Outperform expected return >+10% Neutral expected return from 10% to +10% Underperform expected return <10% Macquarie Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 Sept AU/NZ Asia RSA USA CA EUR Outperform 50.00% 56.85% 61.54% 41.38% 63.19% 44.15% (for US coverage by MCUSA, 7.35% of stocks covered are investment banking clients) Neutral 36.62% 25.14% 27.69% 52.13% 30.77% 30.57% (for US coverage by MCUSA, 9.31% of stocks covered are investment banking clients) Underperform 13.38% 18.02% 10.77% 6.49% 6.04% 25.28% (for US coverage by MCUSA, 0.00% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. The analyst and/or associated parties own or have other interests in securities issued by BHP. Macquarie Bank Limited makes a market in the securities in respect of Limited. The Macquarie Group advised Leighton Holdings on the sale of HWE Mining Iron Ore to as announced on 9 August. Within the last 12 months, Macquarie Group has received compensation for investment advisory services from Leighton Holdings. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 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