Financial Analysis and Valuation for BHP Billiton and Competitor Overview

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
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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