BHP Billiton tipped for 30% gain

[] — THE international share price of BHP Billiton, the world’s largest mining group, suddenly took off in London and Australia last week – definitely creating a new opportunity for South African investors.

Billiton’s JSE (rand) price increased by more than 30% last year, and if the expectations of the world’s leading investment analysts are realised, a similar increase will be on the cards for this year.

But things weren’t so rosy everywhere last year. BHP Billiton’s share price made no headway on the London Stock Exchange (LSE). The current price of 965p is practically the same as a year ago. In Australia (the group’s main location) the price at least improved from A$23.50 to its current A$25.50.

For purposes of listing, BHP Billiton is made up of two parts: about 40% of the company has it origin in South Africa, the remnant of the old General Mining, and the shares have a primary listing on the LSE.

Australia’s Broken Hill Properties (BHP) made up 60% of the new company when it was amalgamated in 2001 and that share’s primary listing is in Australia.
However, the two sets of shares are run as a single company. The total market capitalisation of the entire group is about £57bn, considerably more than Anglo’s market value of £38bn. However, Anglo’s share price fared much better than Billiton’s last year.

In London, Anglo’s share price increased by almost 30%. Thanks to the significant strengthening of sterling against the rand over the past year, South African investors in rand enjoyed a 70% rise in Anglo’s share price.

Investment analysts remain very excited concerning the prospects for both shares, as well as for their smaller colleague, Rio Tinto. Though Anglo’s price on the JSE kicked off the very first day of the new year with a R5 increase to R347/share, international analysts say it’s starting to increasingly look as if BHP Billiton will be the overall winner this year.

All the views of the world’s top analysts of shares such as Anglo and Billiton are collected by, among others, Thomsons Financial, and are made available on websites such as Yahoo! Finance, and those were used in compiling our table. A weighting is allocated to each unqualified buy and sell recommendation, as well as to the intermediary positions held by some of the share analysts.

In the case of the table, an average of one means that all the analysts agree that the share is a perfect buying opportunity, while a weighting of three indicates that the views are extremely negative and that the share should preferably not be bought. According to the latest analyses, a weighting of 1,4 is allocated to Billiton. Rio Tinto gets 1.5 and Anglo does considerably worse at 1.8.

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Along with those buying and selling recommendations, analysts also estimate what they think the share price will be at the end of 2007. Of course, that’s just an estimate, and the best analysts are sometimes wide of the mark. Nevertheless, it’s a valuable quantitative yardstick that prospective investors can use to gauge the shares.

According to Yahoo!, Billiton’s target price is 1,248p 12 months from now. That’s a 30% increase in sterling – which, incidentally, is also currently the world’s most popular currency.

For Rio Tinto’s share price, a 25% increase is predicted. But for the moment it looks as if the analysts think Anglo is going to bog down somewhat and that its price will probably not increase further this year.

Investors and readers may disagree with that view and the further unbundling of Anglo could very easily unlock a lot more value. But it’s nevertheless very enlightening to work through the table and realise that the science of analysing investment opportunities and ordering them by large asset managers before an investment is made is more than just a thumb suck.

Comparison of investment merits of the big three mines.

The way to buy BHP Billiton

IF BHP Billiton’s share price really does increase by 30% over the coming year from its current R131 to R170/share and, in addition, possibly distributes a dividend of R3/share, the more daredevil investor might like to look at one of the five listed instalment shares on Billiton.

These financial instruments make it possible for investors to buy shares by paying a first instalment now – which is sometimes as little as 40% of the current price of the ordinary share. But they nevertheless enjoy all the benefits of owning the ordinary shares in full. It’s almost the same as buying a car on HP – but with one big difference: the share’s price sometimes rises.

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The five listed instalment shares on Billiton carry different risks and therefore also have different gearing benefits. BILIHA is one of the “turbo’ shares recently issued by Investec. Investors currently need R39 to buy one Billiton share, which is trading at R131 on the JSE. The gearing benefit of that instalment share is therefore an entire 3.4 times.

If BHP Billiton’s price in fact reaches R170 at year-end 2007 and a dividend of R3/share is paid, the value of that instalment share will rise from the current R39 to R75,50 – that is, a return of 93% on the investment. However, if BHP Billiton’s share price were suddenly to fall to below R110,50 over the coming year, Investec will cancel the instrument and the investor will only get R13 back. Make sure your risk profile can tolerate that before you buy BILIHA.

Somewhat safer would be Standard Bank’s instalment share on BHP Billiton (BILSTA), while Nedbank’s (BILNIC), with a gearing ratio of 1.7, is nearly as safe as the ordinary Billiton share itself.

* De Klerk holds shares in BILIHA.