Recommendations For BHP Billiton: Accounting Analysis, Financial Analysis And Forecasting

Competitor Analysis: Newcrest Mining

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.

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).

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).

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).

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

Accounting Analysis

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 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).

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.

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). 

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.

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.

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).

Alternative approach- Liquidity Ratio
		BHP Billiton	Newcrest Mining
Particulars		2017	2016	2017	2016
		$m	$m	$m	$m
Current Assets	A	21056.0	17714.0	1249.0	803.0
Current Liabilities	B	11366.0	12340.0	664.0	670.0
Inventory	C	3673.0	3411.0	556.0	545.0
Prepayments & Other Assets	D	0.0	0.0	56.0	69.0
Cash & Cash equivalents	E	14153.0	10319.0	492.0	53.0
Current Ratio	F=A/B	1.85	1.44	1.88	1.20
Quick Ratio	G=(A-C-D)/B	1.53	1.16	0.96	0.28
Cash Ratio	H=E/B	1.25	0.84	0.74	0.08

Table: Liquidity Ratio

(Source: Bhp.com, 2018)

The additional decomposition analysis performed with alternative approach which includes computation of liquidity ratio such as current ratio, quick ratio and Cash ratio.

The graphical demonstration of information clearly suggests that the Cash ratio and quick ratio of BHP Billiton is in a slightly better position. This shows that BHP Billiton is in a better position financing its daily short-term expenses by maintaining better cash repository (Nguyen, Nguyen & Yin, 2015).

Alternative approach- Market Value Ratio
		BHP Billiton	Newcrest Mining
Particulars		2017	2016	2017	2016
		$	$	$	$
Earnings per Share (TTM)	A	1.11	-1.20	0.40	0.43
Dividend per Share	B	0.54	0.78	0.15	0.08
Market Value per Share	C	$            23.28	$           18.65	$             5.62	$       5.68
Dividend Pay-out Ratio	D=B/A	49%	-65%	37%	17%
Dividend Yield Rate	E=B/C	2.32%	4.18%	2.67%	1.32%
Price-to-Earnings Ratio (TTM)	F=C/A	21.03	-15.54	13.98	13.12

Table: Market Value Ratio

(Source: Bhp.com, 2018)

The market performance ratio of BHP Billiton is clearly outperforming its competitors like Newcrest Mining Limited. The present dividend pay-out ratio of 49% is significantly higher than the former company. The company has also increased its price to earnings ratio from (15.54) to a whopping 21.03 (Akbas et al., 2017).

The relevance of the asset management ratios, debt and safety ratios has been already mentioned in the earlier sections of the study. It needs to be discerned that Newcrest Mining Ltd has better utilised its fixed assets to finance its creditors. On the other hand, BHP Billiton has shown better results in terms of financing its liabilities with assets available to the company. This has resulted in an improved debt equity ratio (Wang, 2014).

Particulars	2016 (in million $)	2017 (in million $)
Cash flows from operating activities:
Cash generated from operations	12,671	19,377
Dividends received	301	636
Interest received	128	164
Interest paid	-830	-1,149
Settlement of cash management related instruments	–	-140
Net income tax and royalty-related taxation refunded	641	501
Net income tax and royalty-related taxation paid	-2,286	-2,585
Net cash flows from operating activities	10,625	16,804
Cash flows from investing activities:
Purchases of property, plant and equipment	-6,946	-4,252
Exploration expenditure	-765	-968
Exploration expenditure expensed and included in operating cash flows	430	612
Net investment and funding of equity accounted investments	40	-234
Proceeds from sale of assets	107	648
Proceeds from divestment of subsidiaries, operations and joint operations, net of their cash	166	186
Other investing	-277	-153
Net investing cash flows from Continuing operations	-7,245	-4,161
Cash flows from financing activities:
Proceeds from interest bearing liabilities	7,239	1,577
Proceeds/(settlements) from debt related instruments	156	36
Repayment of interest-bearing liabilities	-2,788	-7,120
Proceeds from ordinary shares	–	–
(Distributions)/contributions to/from non-controlling interests	–	-16
Purchase of shares by Employee Share Ownership Plan (ESOP) Trusts	-106	-108
Dividends paid	-4,130	-2,921
Dividends paid to non-controlling interests	-87	-581
Net cash flows used in financing activities	284	-9,133
Net increase/(decrease) in cash and cash equivalents	3,664	3,510
Cash and cash equivalents at beginning of year	6,613	10,276
Foreign currency exchange rate changes on cash and cash equivalents	-1	322
Cash and cash equivalents at end of year	10,276	14,108

Red flag areas

Table: Cash Flow Analysis of BHP Billiton

(Source: Bhp.com, 2018)

The Cash flow priorities have been considered as per net cash from operating activities, investing activities and financing activities.

The graphical demonstration of information for the Cash flow analysis of BHP Billiton clearly shows that there is a significant increase in the net cash flows from the operating activities. This is mainly a resultant of cash generated from the operating activities amounting to $ 19,377m and dividends of $ 636m. However, in all the other areas there is a significant decrease in cash flows of the company (Chan & Rate, 2018).

Key forecast variables and prior year values

The Key forecast variables have been considered with an analysis of main scenarios and implementing alternative forecasts plans. The Key judgements of forecasting is also depicted with exploration activities. The company has an enormously considered new investments for managing risk associated to forecasting impacts of climate change (Ashmarina, Zotova & Smolina, 2016).

Main Scenario – forecasts

The main scenario forecasts have been explained as per increasing nature of price to earnings ratio and dividend yield in the future years. This depiction is done after significant comparison of the values with Newcrest Mining.

Scenario analysis – alternative forecasts

The high-quality scenario analysis is resembled with portfolio evaluation. This is seen to forecast the subject under uncertainty for using rapid technology and policy changes. These can be referred to the previous findings which are stated as follows:

1. The forecast of Cash generated from operations is depicted with an increasing trend in the future. This is evident with an increase of cash from operations increase from $ 12,671 to $ 19,377.
2. Net investing cash flows from Continuing operations is also discerned to increase the future years.

The low-quality scenario analysis is evident that adaptation of company with risk-based approach for the physical impacts of climate change (Salikin, Ab Wahab & Muhammad, 2014).

Cost of Capital

Calculation of required rate of return
Month	BHP Billiton	Percentage daily change	Newcrest Mining	Percentage daily change	Closing Price Of ASX	Percentage change closing price of ASX
Sep-17	null		null		null
Oct-17	40.98	null	22.41	null	5909	null
Nov-17	41.549999	1.391%	23.309999	4.016%	5969.899902	1.031%
Dec-17	45.990002	10.686%	22.82	-2.102%	6065.100098	1.595%
Jan-18	49.02	6.588%	22.67	-0.657%	6037.700195	-0.452%
Feb-18	46.5	-5.141%	21.25	-6.264%	6016	-0.359%
Mar-18	44.43	-4.452%	19.559999	-7.953%	5759.399902	-4.265%
Apr-18	46.75	5.222%	21.15	8.129%	5982.700195	3.877%
May-18	49.779999	6.481%	20.76	-1.844%	6011.899902	0.488%
Jun-18	50.009998	0.462%	21.799999	5.010%	6194.600098	3.039%
Jul-18	52.259998	4.499%	21.629999	-0.780%	6280.200195	1.382%
Aug-18	48.040001	-8.075%	19.389999	-10.356%	6319.5	0.626%
Sep-18	49.540001	3.122%	19.360001	-0.155%	6181.200195	-2.188%
	βa	0.86	βb	1.51
	Risk Free Rate (Rf)	2.24%		2.24%	(As per Government Bond rate in Australia)
	Expected market return of BHP Billiton (Rm1)	1.89%	Expected market return of Newcrest Mining (Rm2)	-1.18%
	Required rate of return	1.938%		-2.929%

Table: Calculation of required rate of return of BHP Billiton and Newcrest Mining

(Source: As created by the author)

WACC
Re	Cost of equity
Rd	Cost of debt
Equity	Market value of the firm’s equity
Debt	Market value of the firm’s debt
E/V	Percentage of financing that is equity
D/V	Percentage of financing that is debt
TC	Corporate tax rate
	BHP Billiton	Newcrest Mining
Re	1.9%	-2.9%
Rd	2%	-1%
Equity	62726	7534
Debt	54280	4049
E/V	0.536	0.650
D/V	0.46	0.35
TC	30%	30%
WACC	1.65%	-2.19%

Table: Calculation of WACC of BHP Billiton and Newcrest Mining

(Source: As created by the author)

The weighted average cost of capital signifies the rate at which the company will pay on an average to its security holders. This is mainly required to finance a particular asset. The lower is the rate the better it is for the company. Therefore, as per the standard measure, a WACC rate of less than 10% is considered to be reliable in nature (Collier, Haughwout, Kunreuther, Michel-Kerjan & Stewart, 2016).

Model 1
Market Value of equity
Market Value of equity (MVE)
Share Price (SP)	0.001671	million
Number of Oustanding Shares (NOS)	5323	million
MVE	=	SP x NOS
MVE	=	8.9	million

Table: Model 1- Market Value of equity

(Source: As created by the author)

Model 2
Fair equity value
Fair Equity Value (FEV)
Enterprise Value (EV)	117006
Net debt (ND)	54280
FEV	=	EV – ND
FEV	=	62726	million

Table: Model 2- Fair equity value

(Source: As created by the author)

This computation is also helpful in suggesting that the terminal value will be in the best interest of the shareholders for future investment purposes. Terminal value computation is based on perpetual growth rate of 37% and WACC of 1.65% as computer previously. The overall value of $ 1172145 is best as per industry standard which is definitely favourable for the investors and future growth prospects.

Terminal Value
Terminal Value (TV)
Free Cash Flow (FCF)	14108
Perpetual Growth Rate (g)	37%
Weighted Average Cost of Capital (WACC)	1.65%
TV	=	[FCF(1+g)]/WACC-g
TV	=	1172145

Risk management strategy

Table: Terminal Value of BHP Billiton

(Source: As created by the author)

The model interpretations of equity valuation suggest an optimistic scenario for the investors. This is evident with a favourable rate of WACC and a high amount of overall terminal value. Moreover, the equity of the company can be seen to be higher than the debt borrowings. This reflects a positive impact on the investors.

Conclusion and recommendations

It can be concluded that despite of significant areas of drawbacks of BHP Billiton in terms of return on assets, the company has performed significantly well in all other areas. Therefore, based on the market performance ratios and other ratios suggesting financial stability it is recommended for the investors to consider BHP Billiton for future investment purposes rather than other players in the mining industry.

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