Financial Analysis and Valuation of BHP Billiton: A Detailed Report

This report provides a comprehensive financial analysis and valuation of BHP Billiton, comparing its performance to Newcrest Mining. The analysis covers firm and industry overviews, accounting policies, and financial ratios, including profitability, leverage, and efficiency. It assesses accounting flexibility and strategy, identifies potential red flags, and performs cash flow analysis. The report includes forecasting, scenario analysis, and valuation using the Weighted Average Cost of Capital (WACC), concluding with recommendations based on the financial performance. The report uses the annual reports of 2017 for the analysis and also includes graphical representations of ratios. It also examines the quality of disclosure and accounting implementation. The report's conclusion suggests that BHP Billiton's financial assets, cash flows, and risk/return ratios are in a better position than its competitors. This report offers valuable insights for students studying financial analysis and valuation.

Running head: FINANCIAL ANALYSIS AND VALUATION
Financial Analysis and Valuation
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1FINANCIAL ANALYSIS AND VALUATION
Executive Summary
The main excerpts of the study are based on financial valuation analysis for BHP Billiton and
its industry competitors. The study has encompassed sections such as forms economy and
overview of the background. It has also suggested about Competitor overview and
background, accounting policies and assessment of overall accounting strategy. The financial
analysis includes competition of the financial ratios along with performing cash analysis. The
overall outcomes have stated that BHP Billiton’s financial assets, cash flows and composition
of risk and return ratios are in a much better position than its contemporaries such as
Newcrest Mining. The forecasting and analysis have also suggested a WACC rate which is
the main rationale for investment in BHP Billiton.

2FINANCIAL ANALYSIS AND VALUATION
Table of Content
s
Introduction and Overview........................................................................................................4
Firm overview and background.............................................................................................4
Industry / Economy overview and background.....................................................................4
Competitor overview and background...................................................................................4
Accounting Analysis..................................................................................................................4
Key accounting policies.........................................................................................................5
Assessing accounting flexibility............................................................................................5
Accounting Strategy...............................................................................................................5
Quality of disclosure..............................................................................................................6
Red flags identification..........................................................................................................6
Accounting implementation...................................................................................................7
Financial Analysis......................................................................................................................7
Initial Ratios – Traditional decomposition (3 factor).............................................................7
Additional decomposition analysis......................................................................................12
Asset Management and Debt and Safety.............................................................................14
Cash Flow analysis...............................................................................................................14
Forecasting...............................................................................................................................17
Key forecast variables and prior year values.......................................................................17
Main Scenario – forecasts....................................................................................................17

3FINANCIAL ANALYSIS AND VALUATION
Scenario analysis – alternative forecasts..............................................................................17
Valuation..................................................................................................................................18
Cost of Capital......................................................................................................................18
Model – main model and scenario analysis.........................................................................20
Diagnostics...........................................................................................................................21
Model Interpretation.............................................................................................................21
Conclusion and recommendations...........................................................................................22
References................................................................................................................................23

4FINANCIAL ANALYSIS AND VALUATION
Introduction and Overview
The study aims to present the recommendations for BHP Billiton in terms of
accounting analysis, financial analysis and forecasting. The study has selected the competitor
as Newcrest Mining which is also listed under ASX top 50 list of companies.
Firm overview and background
BHP Billiton headquartered in Melbourne Australia is identified as a global contender
in the field of resources. The main operations include extraction of oil, minerals and gas and
sell it on a global platform. The main strategies include cost efficiency, limited race,
attractive return, improving safety, value and flexibility. The capital Management is done
with capital allocation framework for maximising the value of every dollar earned for the
shareholders (BHP, 2018).
Industry / Economy overview and background
Mining industry in Australia is considered as one of the primary industries thereby
contributing a significant share to the economy. The Australian mining services associated
with technology exports are predicted to be more than $ 2 billion annually. The Australian
Labour Party has incorporated the policy of “no new uranium mines” minimise the overall
impact of mining on environment (Australian Mining, 2018).
Competitor overview and background
The industry comparison has been performed by selecting Newcrest Mining Ltd as the
potential competitor of BHP Billiton. Newcrest is recognised as one of the world’s largest
gold mining companies. The main operations are based in Cadia Valley, Telfer, Lihir and
Gosowong (Newcrest.com.au, 2018).
Accounting Analysis

5FINANCIAL ANALYSIS AND VALUATION
Key accounting policies
The accounting policy on exploration expense ensures that the portion of exploration
expenditure is not capitalised under PPE. All the critical accounting policies identified by
BHP Billiton is depicted in areas of taxation, inventories, development expenditure,
overburdened removal cost, depreciation of PPE, impairments of current assets, closure and
rehabilitation provisions (Renz, 2016). Moreover, as per the relevant disclosures under IFRS
the financial results and position is assessed appropriately. The choice of the accounting
policy pertaining to capital markets such as RAC is based on the practices, compliance and
areas of judgement for adhering to the legal requirements and external audit (Finkler, Smith,
Calabrese & Purtell, 2016).
Assessing accounting flexibility
The accounting flexibility aspect can be depicted under on for US value and
flexibility section. The regular review of the portfolio with the onshore US assets are seen
with non-core and forcing options for quality acreage. This is done to maximise the overall
value and discipline of larger completions such as acreage, swaps, gas hedging and
divestments. Even with the capital Management the balance sheet of the company provides
stable and flexible choices to the management. The capital and exploration expenditure were
reduced by 32% in FY 2017. This was possible by efficient capital projects exercised with
flexibility in the onshore US projects (Barr & McClellan, 2018).
Accounting Strategy
Implementation of accounting strategy by the company is mainly inferred in the areas
of cost efficiency focus such as reducing the overall cost by 40% since FY 2012. In addition
to this, the latent capacity attractiveness is evident with exploring further opportunities of
optimising and debottlenecking the existing rail, mine, processing facilities and rigs. The
accounting strategy further aims for receiving timely value and return. This is done by

6FINANCIAL ANALYSIS AND VALUATION
investigating the best ways to realise the value of the project as per the best interest of the
shareholders (Balazs, Liu-Barker, Foiles, Thomas & Lee, 2016).
Quality of disclosure
The quality of the disclosure can be ascertained with accuracy in its external drivers
such as competitive elements, economic, social, technical and regulatory policies. In addition
to this, there is a significant disclosure pertaining to strategy objectives, governance, risk,
immigration and business model (Karadag, 2015). The internal context of the disclosures
seen with accuracy and financial assets, physical assets, customers, innovation, processes and
supply chain. Similarly, the performance component is also adequately declared with
environmental, said mental and operational performance. The disclosure is seen to be
accurate in nature with accurate liquidity analysis it is identified with current ratio, quick
ratio and cash issue (McKinney, 2015).
Red flags identification
The sources of red flag areas need to be identified with external risk factors such as
fluctuation in the prices of the commodities and overall impact with the ongoing global
economic volatility which may have negative impact on the financial performance. In
addition to this the financial results may also get affected in a negative manner with
fluctuations of exchange rate (Petty et al., 2015). The external red flag areas and we also seen
with degrees in Chinese demand. The Chinese market is considered as global demand driving
aspect for materials over the past decade for BHP Billiton. There may be several judicial
actions taken by the government and Australian community which may have detrimental
impact on the operations and significant infrastructure such as rail, power and water (Attig,
Boubakri, El Ghoul & Guedhami, 2016).

7FINANCIAL ANALYSIS AND VALUATION
Accounting implementation
In order to mitigate the issues of exchange rates, the risk management approach is
depicted with diversification of portfolio of commodities, geographies and currencies in
terms of minimising the overall volatility. Therefore, the risk management strategy of BHP
Billiton includes market, currency and commodity risk. Such risks are managed with
continuously reviewing the information with stock exchanges and overseeing the overall
process for ensuring the rates are changed and disclosed in a timely, accurate and complete
manner in the financial statement (Banerjee, Duflo, Imbert, Mathew & Pande, 2016).
Financial Analysis
Initial Ratios – Traditional decomposition (3 factor)
Profitability Ratios:
BHP Billiton Newcrest Mining
Particulars` 2017 2016 2017 2016
$m $m $m $m
Profit for the year A 6222.0 -6207.0 319.0 355.0
Revenue B 38285.0 30912.0 3477.0 3295.0
Total Assets C 117006.0 118953.0 11583.0 1191.0
Total Equity D 62726.0 60071.0 7534.0 7120.0
Net Profit Margin E= A/B 16.25% -20.08% 9.17% 10.77%
Return on Equity (ROE) F=A/D 9.92% -10.33% 4.23% 4.99%
Return on Assets G=A/C 5.32% -5.22% 2.75% 29.81%
Table: Profitability Ratios
(Source: Bhp.com, 2018)
The computation of three factor approach has been considered with ROA, ROE,
Leverage, turnover and margins for both BHP Billiton and Newcrest Mining. The main
information is extracted from the annual report of 2017 for both the companies.

8FINANCIAL ANALYSIS AND VALUATION
2017 2016
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00% 16.25%
-20.08%
9.17% 10.77%
Net Profi t Margin
BHP Billiton Newcrest Mining
2017 2016
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
5.32%
-5.22%
2.75%
29.81%
Return on Assets (ROA)
BHP Billiton Newcrest Mining
2017 2016
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00% 9.92%
-10.33%
4.23% 4.99%
Return on Equity (ROE)
BHP Billiton Newcrest Mining
Figure: Profitability Ratios
(Source: Bhp.com, 2018)
The graphical representation of the companies and clearly shows that in terms of
return on assets Newcrest Mining have shown a considerable improvement in compared to
BHP Billiton. However, BHP Billiton has been able to maintain a better return on equity and
net profit margins. This suggests that it has been able to better utilise the earnings from shares
in compared to its industry rivals such as Newcrest (Martin, 2016).

9FINANCIAL ANALYSIS AND VALUATION
Financial Leverage Ratio:
BHP Billiton Newcrest Mining
Particulars` 2017 2016 2017 2016
$m $m $m $m
Total Assets A 117006.0 118953.0 11583.0 1191.0
Total Equity B 62726.0 60071.0 7534.0 7120.0
Total Liabilities C 54280.0 58882.0 4049.0 4071.0
Debt-to-Equity Ratio D=C/B 0.87 0.98 0.54 0.57
Debt Ratio E=C/A 0.464 0.495 0.350 3.418
Equity Ratio F=B/A 0.536 0.505 0.650 5.978
Table: Financial Leverage Ratio
(Source: Bhp.com, 2018)
The important component of financial leverage ratio is depicted with the computation
of debt-to-equity ratio, that ratio and equity ratio.
2017 2016
0.00
0.20
0.40
0.60
0.80
1.00
1.20 0.87 0.98
0.54 0.57
Debt-to-Equity Rati o
BHP Billiton Newcrest Mining
2017 2016
0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
0.464 0.4950.350
3.418
Debt Ratio
BHP Billiton Newcrest Mining
2017 2016
0.000
2.000
4.000
6.000
8.000
0.536 0.5050.650
5.978
Equity Rati o
BHP Billiton Newcrest Mining

10FINANCIAL ANALYSIS AND VALUATION
Figure: Financial Leverage Ratio
(Source: Bhp.com, 2018)
The graphical assessment of the information clearly depicts that both the companies
have taken significant initiatives in reducing the overall debt burden from 2016 to 2017.
Therefore, there is less reliance on debt instruments for financing its assets.
Efficiency Ratio:
BHP Billiton Newcrest Mining
Particulars` 2017 2016 2017 2016
$m $m $m $m
Total Assets A 117006.0 118953.0 11583.0 1191.0
Fixed Assets B 76261.0 74207.0 3784.0 1006.0
Revenue C 38285.0 30912.0 3477.0 3295.0
Trade & Other Receivables D 2836.0 3155.0 88.0 134.0
Total Asset Turnover Ratio E=C/A 0.33 0.26 0.30 2.77
Fixed Asset Turnover Ratio F=C/B 0.50 0.42 0.92 3.28
Receivables Turnover Ratio G=C/D 7.41% 10.21% 2.53% 4.07%
Table: Efficiency Ratio
(Source: Bhp.com, 2018)
The analysis of efficiency ratio was computed for evaluating the third factor which is
related to the assessment of asset turnover ratio, receivables turnover ratio and fixed assets
turnover ratio.

11FINANCIAL ANALYSIS AND VALUATION
2017 2016
0.00
0.50
1.00
1.50
2.00
2.50
3.00
0.33 0.260.30
2.77
Total Asset Turnover
Rati o
BHP Billiton Newcrest Mining
2017 2016
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
7.41%
10.21%
2.53%
4.07%
Receivables Turnover
Ratio
BHP Billiton Newcrest Mining
2017 2016
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.50 0.42
0.92
3.28
Fixed Asset Turnover
Ratio
BHP Billiton Newcrest Mining
Figure: Efficiency Ratio
(Source: Bhp.com, 2018)
The graphical presentation of information shows that BHP Billiton is in a better
position for receiving the due amount from its debtors. In addition to this, the fixed asset
turnover ratio has considerably increased in case of Newcrest Mining which suggests that are
fixed asset utilisation by the company (Irimia-Dieguez, Medina-Lopez & Alfalla-Luque,
2015).
Additional decomposition analysis
Alternative approach- Liquidity Ratio