PGM Capital – Blog
26Oct/140

BHP Billiton Operating Results Q3-2014

By Eric Panneflek

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the BHP Billiton (ASX: BHP), operation report for the quarter ending September 30, 2014, which was released on Wednesday, October 22, 2014.

COMPANY PROFILE:
BHP Billiton is an Anglo-Australian multinational mining, metals and petroleum company headquartered in Melbourne, Australia. It is the world's largest mining company measured by 2013 revenues.

The company was created in 2001 through the merger of the Australian "Broken Hill Proprietary Company Limited" (BHP) and the Anglo–Dutch Billiton plc.

Below images show the former respective logos of "Broken Hill Proprietary" (BHP) and Billiton plc.

BHP_Billiton_(logo) Billiton_logo

On August 19, 2014, BHP Billiton announced the company would be split in two.

  • The main company will focus on the major iron ore, coal, copper and petroleum assets.
  • A newly formed entity named NewCo would house the company's non-core asset, such as aluminium, coal, manganese, nickel and silver and would be listed on the Australian Securities Exchange.

"BHP Billition Ltd" operates a wide variety of mining, processing and oil and gas production.

In FY2014, the company workforce consisted of approximately 123,800 employees and contractors at 130 locations in 21 countries.

At the close of trading day on October 24, 2014, it had a market capitalization of approx. 160 Billion.

OPERATION RESULTS Q2-2014, HIGHLIGHTS:
Group production increased by 9% during the period with records achieved for eight operations and four commodities. Production guidance remains unchanged and is on track to deliver Group production growth of 16% over the two years to the end of the 2015 financial year.

FY 2015 guidance remains on track for production of petroleum, copper, iron ore, metallurgical coal, and energy coal, BHP Billiton reported on Wednesday.

IRON ORE:
Iron ore production jumped 17% to a record 57 million metric tons in the September 2014 quarter. Total iron ore production is forecast to increase by 11% in the Fiscal Year 2015 to 225 Mt, which complies with prior guidance.

-501264

  • Western Australia Iron Ore production increased 15% to a record 62 million metric tons.
  • In addition to strong operations performance at the mine, a higher proportion of direct to ship ore increased outflow capacity at port and facilities record sales volumes of 63 Mt.
  • The company expects unit cash costs of less than US$ 20 per ton in the medium term, a 25% reduction on the average achieve in Fiscal Year 2014.

COAL:

  • Metallurgical coal production increased 25% to 13 million metric tons during the September 2014 quarter as Queensland Coal achieved record quarterly production and sales volumes.
  • Illawarra Coal output soared 64% during the same quarter to 2.3 Mt as productivity increases enabled the mine to achieve record run-of-mine production.
  • However, energy coal production declined by 9% during the September 2014 quarter to 18 Mt, due to adverse weather conditions in Columbia and at New South Wales in Australia.
  • Coal production also declined at the Navajo Coal operation in New Mexico following the permanent closure of three of the five power units at the Four Corners Power Plant.
  • Total energy coal production of 73 Mt is expected for the Fiscal Year 2015, consistent with prior guidance.

COPPER:
BHP Billiton reported copper production declined by 3% during the September 2014 quarter to 389000 metric tons. However, guidance for the Fiscal Year 2015 remains at 1.8 Mt.

  • Escondida copper production decreased by 3% due to a 12% decline in ore grade, a two-day strike, and a power outage throughout Northern Chile.
  • At Pampa Norte, production was up 28% to 56 000 metric tons, as Spence benefited from higher grades and recovery.
  • While Olympic Dam copper production substantially increased by 41% in the September quarter to 39 kt, the completion of planned smelter maintenance led to a 28% decline in output from the June 2014 quarter.
  • Antamina copper production plunged by 39% in the September 2014 quarter to 26 kt due to lower grades.

PETROLEUM:
Total petroleum production increased 7% in the September 2014 quarter to 67.4 million barrels of oil equivalent. Guidance for the 2015 financial year remains unchanged at 255 MMboe (Million Barrels of Oil Equivalent)

  • Crude oil, condensate and natural gas liquids production increased by 19% to a record 30.9 MMboe in the September 2014 quarter.
  • Natural gas production of 2019 bcf (billion cubic feet) was unchanged in the September quarter.

ALUMINIUM, MANGANESE & NICKEL:

Aluminium:
Aluminium production was unchanged in the September 2014 quarter at 1.2 Mt, due to record production at the Alumar refinery.

  • However, aluminum production decreased by 16% during the same quarter to 261 kt, due to the cessation of smelting activities in June 2014 and the suspension of capacity at the Alumar smelter during the 2014 financial year.

Manganese:
Manganese ore production declined 12% in the September 2014 quarter to 36 Kt, primarily as a result of the closure of the Perseverance underground mine at Nickel West in November 2013.

Nickel:
“Consistent with prior guidance, we expect sale-able nickel production at Nickel West to decline by 4% in the 2015 financial year to 95 kt,” said BHP Billiton. “Ferro nickel production at Cerro Matoso is expected to decline by 3% to 43 kt as a result of lower grades and recoveries.”

Source: 

PGM CAPITAL COMMENTS:
BHP Billiton’s historic US$15 billion spin-off, Separated via a demerger, has the potential to unlock shareholder value by significantly simplifying the BHP Billiton Group (‘Group’) and creating two portfolios of complementary assets.

Once simplified, BHP Billiton will almost exclusively be focused on its exceptionally large, long-life iron ore, copper, coal, petroleum and potash basins. With fewer assets and a greater upstream focus, the Group will be able to reduce costs and improve the productivity of its largest businesses more quickly. As a result, its portfolio is expected to generate stronger growth in free cash flow and a superior return on investment.

On August 19 the company presented its financial report for its FY-2014 that ended on June 30, 2014 with the following highlights:

  • Total revenue was 67.2 billion US-Dollars an increase of 2 percent compared with fiscal year 2013.
  • Net Operating cash flow of 25.4 billion US-Dollars an increase of 26 percent compared with the previous fiscal year.
  • A total dividend per share of US$ 1.21 an increase of 4 US-Dollar cents, compared with its dividend of Fiscal Year 2013.

Source:

Below figure shows the distribution of the total FY-2014 earnings the current BHP Billiton when we divide them between of the simplified BHP Billiton Group and "NewCo".

jbbhp_729-620x349

After reviewing above figure, the critical reader will agree with us that BHP Billiton is separating the assets it doesn't want into "Newco"

We believe that BHP Billiton by separating it aluminum, manganese and nickel assets, and placing them into "Newco" is creating shareholders value for investors in the simplified "BHP Billiton" after completion of  the proposed demerger.

The aluminum sector, due to its energy intensive production on the one hand and lack of pricing power on the other, has become the black sheep of most of the big mining companies, for which reason we have seen them selling or demerging their aluminium sector in order to create shareholders value.

It is also worth mentioning that the company was able to increase its profit and subsequent dividend, despite the slump in commodity prices.

As can be seen from below chart, the share of the company, which has increased in value with over one thousand percent over the last 12 years, has been trading sideways since mid 2011, despite the company's fundamentals.

BHP Billiton all time chart

 

With a Price to Earnings ratio of 11.4, a Price to Book of 1.98 and a dividend yield of 4.21 percent we have a BUY rating on the stock of the company.

Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

19Oct/140

The Total Debt of the USA at Record High

By Eric Panneflek

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you, the total debt of the USA, which has reached an all time record of over US$ 60 Trillion at the end of Q2-2014 and the USA Public Debt which currently is near an all time high 18 Trillion US-Dollars.

THE USA PUBLIC DEBT:
On Sunday, October 19, 2014 at 3:00 pm UTC, the USA which is world's largest economy(as measured by GDP), had a National Debt of:

Source: http://www.brillig.com/debt_clock/

As a comparison, Japan, which is currently the world’s fourth largest economy (as measured by GDP), has a debt-to-GDP ratio of 227%. Although this is the highest such ratio in the world, Japan’s debt is approximately US$13.4 trillion, which means the USA with a public debt of US$ 17,906 Trillion, has the largest debt burden in the world.

The U.S. has currently a debt-to-GDP ratio of 104% which seems rather modest in comparison with the one of Japan.

Below chart shows how the US National debt has grown from less than half trillion US-Dollars, at the end of fiscal year 1972, to almost 18 trillion today.

US-Gross-National-Debt-1972-2014

Based on the above most investors would be asking themselves the following questions:

  • If Japan’s debt-to-GDP ratio is more than two times greater than America’s, does this indicate that the USA is far from the edge of the cliff?  or in other words, could the USA Economy be able to support a debt burden of US$30 or US$40 trillion?
  • How did the USA debt grow so large and why does it continue to rise?

In this article we'll try to find an answer to the above mentioned questions.

THE USA PUBLIC DEBT EXPANSION:
When the USA federal government spends more than it collects, the result is a “deficit” which is added to the debt. Therefore, debt expansion is a result of fiscal deficits.

Below chart shows the percentage expansion of the USA Public Debt in the period of 1966 up to 2013.

Percent-Chg-in-Public-Debt-From-1966-to-2013

Above chart shows that:

  • The greatest period of debt expansion occurred from 1980 to 1991 at an average of 13.4%  per year.
  • The next largest increase was during the period from 1974 to 1979 and was on average 10.9% per year.
  • Surprisingly, even though the debt has exploded since 2008, the period from 2008 through the end of 2013 ranks third at an average of 10% per year.

The major reason for the public debt to expand sharply in the period 1974 - 1991, was the August 15, 1971, decision of USA President Nixon’s to decouple the dollar from the gold standard, with the consequence that since the US-Dollar was no longer redeemable for gold, the USA government was free to overspend and able to print an unlimited amount of money to pay for it.

Related to the period, 2008 - 2013, it is worth mentioning that the USA government debt ballooned in fiscal year 2014, that ended on September 30 with 1.086 trillion US-Dollars.

Regardless of what has been proffered by the White House, the Congressional Budget Office, and others, the total gross national debt outstanding of the US hit 17.824 trillion US-Dollars in fiscal 2014 ended September 30: A jump for the fiscal year of US$1.086 trillion.

As can be seen from below table this figure could have been worse: note how it jumped on October 1, the first day of fiscal 2015, by another US$51 billion, which is an elegant way of putting some lipstick on the debt in fiscal 2014 – by kicking part of it into the next fiscal year.

US-gross-national-debt-jumps-51billion-1st-day-fiscal-2015

USA TOTAL DEBT AT A RECORD HIGH OF 60 TRILLION DOLLARS:
When we add up all forms of debt in the USA, including government debt, business debt, mortgage debt and consumer debt, at the end of June the USA was over 60 trillion US-Dollars in debt, as can be seen from below chart, from the St. Louis Federal Reserve.

total US debt

Private debt - not government borrowing - is the biggest reason for the huge deficit.

Total US debt at the end of the first quarter of 2014, on March 31 totaled almost US$59.4 trillion - up nearly US$500 billion from the end of the fourth quarter of 2013, according to the data. Total debt (the combination of government, business, mortgage, and consumer debt) was U$2.2 trillion 40 years ago.

PGM CAPITAL COMMENTS:
Over the past four decades the total amount of debt in the United States increased with over 2,700 percent, which is utter insanity, and completely unsustainable. This means that the USA is currently living in the greatest debt bubble of all time, for which the chances for it to go well at the end are very limited.

According to a 2012 study published in the Economist, rapid growth in private debt is a better predictor of recessions than increases in public debt, growth in money supply, or trade imbalances. Consumer credit in the US rose by 33 percent over the last three years, reaching a record-high US$3.18 trillion in April of this year as can be seen from below chart from the St. Louis FED.

total-consumer-credit

On top of this the USA government is passing to its young people the largest single public debt in all of human history. Weighing in at approx. 18 trillion dollars, the U.S. national debt is a colossal behemoth.  And almost all of that debt has been accumulated over the past 40 years.  In fact, 40 years ago the U.S. national debt was less than half a trillion dollars.

The problem is, the more debt the USA has, the more future income must be used to pay the debt and its interest, which reduces the money the USA government and its citizen have to spend.

This will contribute to a slowdown of the USA economy, and at the end the negative effect of the debt load becomes stronger than the positive effect of the added spending and a recession or worse will be triggered.

Most economists believe that the politically acceptable way to reduce the debt so that it can be repaid is by creating inflation, which reduces the real value of the debt with a bonus that inflation also increases the country's GDP with the consequence that the debt-GDP-ratio will be reduced artificially.

On the other hand, inflation will also reduce the real value of savings and pensions and will ultimately have an upwards pressure on interest rates which will destroy the real value of savings pensions, bonds and other fixed income securities.

History have shown, that in this will have a upwards pressure on the price of Gold, Silver and other precious metals as a storage of value and safe haven in times of inflation.

Until next week.

Yours sincerely,

Suriname Times foto

11Oct/140

Will October 2014, be a month to remember?

By Eric Panneflek

Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you, the market rout in the West that started around mid September this year.

USA MARKETS:
U.S. stocks capped a wild week with fresh losses, as sharp declines in technology shares dragged the broader market lower and the Dow Jones Industrial Average fell back into negative territory for the year.

In the week of October 6, the DOW Jones Industrial plunged a whopping 465.59 points or 2.74% as can be seen from below chart.

DOW-5 days

From its all time high of September 19, 2014 of 17,279.74 points, the DOW-30 Index fell with 735.64 points or 4.32 percent in the period of September 19 - October 10 and is now down for the year.

The tech-heavy Nasdaq Composite ended down 102.10 points, or 2.3%, to 4276.24, bringing its losses for the week to 4.5 percent. That marked the largest weekly point decline for the Nasdaq since early August 2011, when the U.S. credit rating was downgraded.

The S&P 500 declined 22.08 points Friday, or 1.1%, to 1906.13, and finished down 3.1 percent for the week, its worst weekly point showing since September 2011.

EUROPEAN MARKETS:
European shares dropped sharply on Friday and Germany's stock market, one of the region's best performers since the 2008 financial crisis, fell to a one-year low as concerns mounted over the German and global economies.

The DAX, which had soared to a record high of 10,050.98 points in June of this year, depreciated with 574.47 points or 6.15 percent, in the week of October 6, to close at 8,788.81 points on Friday October 10 as can be seen from below chart.

DAX 2

As can be seen from below chart the German DAX is down 809.44 points or
8.43 percent Year-to-Date.

DAX on year

The Londen FTSE-100, fell with 3.2 percent during the week of October 6, to close on Friday, October 10 at a 52-week low of 6,339.97 points as can be seen from below chart.

THE VIX AT 20-MONTH HIGH:
The VIX is a trademarked ticker symbol for the Chicago Board Options Exchange Market Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Often referred to as the fear index or the fear gauge, it represents one measure of the market's expectation of stock market volatility over the next 30 day period.

As can be seen from below chart the VIX, spiked up on Friday, October 10 with 2.48 points or 13.22 percent to 21.24 points, which is its highest close in over 8 months.

The VIX Spiking

Above chart shows that the VIX  is up 40% in the week of October 6, and has experienced its 2nd biggest week in over 4 years.

THE CNN FEAR & GREED INDEX AT EXTREME FEAR:
CNN has a "Fear and Greed" index for the market. They use some indicators to attempt to sense how fearful or greedy investors are at the time. They then display their results on a 0-100 scale, 0 (zero) being the most fearful and 100 (one hundred) being the most greedy. If investors are greedy stock prices should rise and if they are fearful stock prices should fall.

As can be seen from below chart, the CNN  Fear & Greed Index hit a record low of 1 (one) on Friday, October 10, 2014, which indicates Extreme Fear.

PGM CAPITAL COMMENTS:
After reading the above, most of you would be asking yourself:

  • So what does this all mean?
  • Could a nasty “October Surprise” be looming?
  • Or even a market crash?

It’s no secret that October can be a scary month for investors. Some of the worst declines in history have taken place this time of year.

  • The Dow falls a total of 23% for October 28 and 29, 1929, in the great market crash of that year.
  • On Black Monday, Oct. 19, 1987, stocks crashed by an even more stunning 22.6 percent.
  • The DOW plunged 7.2 percent on October 27, 1997, during the Asia economic crisis.
  • During the credit market meltdown, the Dow collapsed 7.9 percent on October 15, 2008.

This time around, with the DOW and other Indexes in the West at a much higher level, an equivalent point decline to some of those would be pretty shocking.

Based on the DOW closing price of 16,544.10 of Friday October 10, a decline of 7.2 percent would equate to around a drop of 1,200 or so points, decline of 12.8 percent would be drop of around 2,100 points, and a 22.6 percent decline would be a stunning drop of 3,700+ points.

The last 6 months we have been raising the red flag over and over again that based on fundamental analysis, the Capital Markets in the West, are heavily overvalued and totally disconnected with their respective underlying economies and that it isn't IF but WHEN we'll see a sharp correction of at least 20 percent.

The only reason that the marktets were up, up to September this year was due to the fact Technically they were Bullish and Greed was a a maximum with subsequent the VIX index at a minimum.

The fact that the  DOW, has erased all its yearly gains, can be viewed as a good wash-out catalyst but professional traders use the S&P 500 for their charts, for which the next big line of support is the 200-day moving average at 1,904 as can be seen from below 5-year chart of the S&P-500.

S&P-500 5 year chart

With the close of the S&P-500 at 1,906.13 on Friday October 10, we are very close at this support line, if the S&P breaks through the 1,904 support it might air pocket down to 1,800 which is another 5.6% lower from its close of October 10, 2014. If we get there the S&P 500 will be negative for the year and the VIX will be at least 40, the value it reached during the correction of the summer of 2011, as can be seen from below chart.

VIX at 45

In our blog article of August 17, we informed our readers that Billionaires are selling their stocks of US-Financial companies, are shorting the S&P-500, are buying Gold and stocks of gold- & silver mining Companies.

As can be seen from below chart since mid September this year, US financial stocks tumbling back down to the country's credit level.

The other side of the story is also true for the Asian markets, with low multiples, which haven't gone through a bubble like the ones in the West are up for the year.

As can be seen from below chart the Chinese CSI-300 index Year-to-Date is up with 136.33 points or 5.85 percent as can be seen from below chart.

On the commodities front as can be seen from below chart:

  • Gold was up with 2.7 percent in the week its best week in 6 months.
  • Silver was up with 2.9 percent in the week its best week in 4 months
  • WTI Crude plunged 4.6% - worst week in 9 months; 2-week collapse 8.5% is biggest since June 2012.
  • Most basic commodities were also up during the week.

It is also worth mentioning that regarding Precious metals, Gold, Palladium and Rhodium are all up Year-to-Date.

The questions most investors would be asking themselves is how deep can the markets in the West fall and if it triggers a recession, how deep will this recession be.

Ladies and gentlemen, the markets in the West with the accent on the ones in the USA, and the US-Dollar fundamentally have lost all connections with the economic reality of the respective countries and especially the USA.

The West is up to their eyeballs deep into debt and the economy hasn't gone into recession due to massive money printing of their respective central banks, who have flooded the market with cheap money which has inflated the respective stock markets in the West.

This hot air is now coming out of the markets and soon - based on fear  - we will see investors running to the safety ground of portable hard assets like Gold, Silver and other precious metals, which have suffered so much during the formation of the current stock market bubble that is now imploding.

Last but not least we'll repeat two very important quotes of Warren Buffett and John Maynard Keynes, which most investors have forgotten in the last 3 years of extreme greed and massive speculation.

Warren Buffett:

Be Greedy when others are Fearful and Fearful when others are Greedy.

John Maynard Keynes:

The market can remain irrational longer than you can remain solvent.

Based on the above we are currently adding Gold and other precious metals to our personal portfolio and at the same time we are shorting the USA Markets and the US-Dollar in order to profit from the (coming) correction in US-Equities and the US-Dollar.

Before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don't move in a straight line.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek