BHP Billiton: A Good Looking Stock With a Great Ore Body

Take a bow, stock market. It was a record close for the ASX/200 yesterday, at 6,451. The index climbed 1.5% for the day, thanks in no small part to the hard work of BHP (ASX:BHP) and Rio Tinto (ASX:RIO). BHP finished at AU$43.14 while Rio topped out at AU$106.68.

We have a bit of a man-crush on BHP, we admit. It’s a good looking stock. It’s also got a good looking portfolio of resources. We will find out just how good looking on Wednesday when the company updates its reserves as part of its annual report.

The Olympic Dam mine—which was developed by WMC Resources and acquired by BHP’s outgoing CEO Chip Goodyear in 2005—hosts one third of the world’s defined uranium reserves and one of the largest copper deposits on the planet. “There have been suggestions the mine could be home to the world’s largest gold deposit,” writes Paul Garvey in today’s Financial Review. “The resource base is primarily copper and uranium rich and would need to more than triple in size to eclipse the 175 million ounces of gold within the giant Muruntau deposit in Uzbekistan.”

If you were publishing a sexy mining journal called “Hot Ore Bodies of the World,” Olympic Dam might very well be the centrefold. Harvey says, “It is currently home to a resource of 4.4 billion tones grading 1.1 percent copper, 0.5 grams per tonne of gold and 0.5 kilograms per tonne of uranium oxide.”

 “How does that ore grade compare to a typical gold deposit?” we asked Al Robinson, at Outstanding Investments. “It’s towards the lower end of the scale. Gold is typically only economical to mine using expensive underground facilities when grade exceeds 4 grams per tonne. If the project goes ahead, BHP will run it as an above-ground, open-pit operation.” The pit, in fact, may rival the Super Pit in Kalgoorlie in size and depth.

Yet attractive as BHP’s portfolio of assets is, it can’t disguise the fact that mining is an ugly business. It really is a horrible business to be in.

Think about it. You need good geologists to go out and find you rich ore bodies. You need good engineers to help you produce those bodies in an economic way. Meanwhile, your fixed capital costs are high, while the price you’re paid for what you produce varies. You exist—if you can manage it all—in a business dominated by cyclicality.

How does anyone make a business like that work?

Meanwhile, “House price rises outstrip wages,” writes Bridget Carter for the AAP. “House prices have increased at three times the rate of wages in Australian capital cities over the past decade, reflecting declining affordability, a report shows. A report by Deutsche Bank found that while wages have increased 56 per cent on average since June 1997, house prices in Australia's major capital cities had jumped 168 per cent .”

The gap between house prices and affordability is bridged by debt. But it’s more of a burden than a bridge these days. We suspect the mortgage-lending booms that have led to record debt-to-GDP levels in the UK and the US are going to wreak very real damage here in Australia as the credit crunch plays out in the next year. Higher interest rates absolutely punish those in debt. There’s a lot of punishment in store for a lot of people.

Dan Denning
The Daily Reckoning Australia

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