PEST ANALYSIS

PEST ANALYSIS

Analyst TearsheetCompany Name:BHP Billiton Limited

ASX Code:BHP

Market Capitalisation:AUD 117.5 Billion

Analyst:Hans Centena

Analyst Notes:Political: Australia's mining sector is one of the most business friendly in the world, with domestic companies and overseas miners operating in the country. Australia remains a highly attractive destination for foreign investment despite the recently proposed 30% tax on mining companies' profits in coal and iron ore production. Proposed tax will have a significant impact on investment in the country's mining sector as these concerns are likely to be outweighed by the country's mineral wealth. Australia is currently in talks with China, Malaysia, the Gulf Cooperation Council, Japan and South Korea regarding potential bilateral free trade agreements and is also considering similar agreements with India and Indonesia.

Economic: Export basket is highly concentrated in commodities with the consequence that the economy and currency remain vulnerable to fluctuations in world prices for metals, coal and agricultural goods.

Much of the BHP Billiton's production is for export to China and thus BHP is dependent on sustained growth in the Chinese economy.

Social: Industry players especially BHP Billiton and other players have heightened awareness on increasing global concern about the environment and differentiate itself from its competitors by developing more environmentally friendly systems and processes.

Technological: State involvement in research and development is generally high supported by its regulatory framework that allows further innovations.

PORTERS FIVE FORCES

Analyst tearsheetCompany Name:BHP Billiton Limited

ASX Code:BHP

Market Capitalisation:AUD 117.5 Billion

Analyst:Hans Centena

Threat of New Entrants: Given its vast potential and high quality of infrastructure, Australia is home to some of the biggest names. in the global mining industry. Multinationals operating in the Australian mining industry include Australian companies BHP Billiton, Newcrest Mining, and large overseas miners such as Rio Tinto, Norilsk Nickel and Xstrata. On the whole, Australia's mining sector remains dominated by large miners, with the exception of coal, which could become slightly more fragmented as Hancock Coal and Waratah Coal which develop 30mntpa Alpha and 40mntpa Galilee coal mines, respectively, with output expected to commence in 2013. These projects are the largest planned in the coal sector and thus the two companies will become significant coal miners. Economies of Scale: BHP Billiton enjoys market dominance in Australia - the country with the best mining business environment in the Asia Pacific region. Response to Existing Players: BHP Billiton though has great economies of scale, has undergone aggressive expansions as a result of highly competitive environment and this could be diluted by the equally aggressive expansions planned by other companies.

Threat of Substitutes: Threat of substitution appears to be nil as most products are commodities. BHP's diversified portfolio of high-quality assets provides stable cash flows and an enhanced capacity to expand further to increase its scale.

Bargaining Power of Buyers: Concentration of output supply: Iron ore production output show the greatest increase in output reaching 630mnt (million tonnes) in 2015 from 438mnt in 2010, marking an average annual growth of 7.6%. As iron ore accounts for the largest proportion of the mining sector's value by output, between 30-40%, this increase will have a significant bearing on the country's mining sector value.

Source: Bloomberg Profitability and Supply Growth of Mining Companies Industry growth will be driven by BHP and Rio Tinto as the former expects to increase output from 164 to 220 million tons per annum in 2014 at its operations in Western Australia, while the latter is increasing production from 156 million tons to 283 million tons at its Pilbara operations in 2015. Australia will remain the world's largest bauxite producer with output growth averaging 9.7% per annum, reaching 107 million tons in 2015, from 68 million tons in 2010. Fortescue, Rio Tinto and BHP Billiton still dominate iron ore output by end 2010 with Rio Tinto eating up the lions share of 176 metric tons. Translated to earnings, Rio Tinto reported NPAT of USD 14.32 Billion for the year ended 31 December 2010. In 2010, profit for the year was USD 15.18 Billion (2009: USD 5.34 Billion) of which USD 860 million (2009: USD 463 million) was attributable to non-controlling interests. Fortescue Metals Group reported NPAT of USD 314.12m for the half-year ended 31 December 2010. Revenues from ordinary activities were USD 2.53 Billion, compared to USD 1.18 Billion from the same period last year, primarily due to higher commodity prices and an increase in volume of Fortescue mined ore shipped to customers..

Bargaining Power of Suppliers: Monopoly : As the key uranium miner in Australia, BHP Billiton stands to benefit the most from Australia's efforts to expand its uranium mining sector, which holds much potential for expansion given the country's vast reserves. Differentiation: BHP distinguishes itself from its competitors by the combination of the quality of its assets; deep inventory of growth projects; customer-focused marketing; diversification across countries, commodities, and markets; and its petroleum business.

Competing large producing countries are influencing overall demand in the uranium landscape as expansion for nuclear power (like China) treads a cautious pace due to recent developments on Japan Uranium scare (see table below):

Source: UNESCO

Source: Bloomberg Energy Markets*Uranium output is forecast to increase from 4.48kt in 2008 to 11.8kt in 2015.

Intensity of Rivalry: Figure 1. Iron Ore Output, FY2010 (in million metric tons)

Source: BHP Billiton presentation BHP Billiton's present strategy is to create long-term value through the discovery, development and conversion of natural resources, and the provision of innovative customer and market-focused solutions. The company has plans to increase copper output over the long term. The company's copper output is set to decline in the short term as falling grades at Escondida will reduce output by between 5-10% a year. BHP is likely to lose competitive advantage in this field as its expansion plans are overshadowed by its competitors Xstrata and Rio Tinto.

BHP is also focusing to increase coal production going forward as this sector has the highest profit margins.

BHP has underperformed compared with the FTSE 350 Mining Index since 2009 and has lost competitive advantage against its peers. Table of industry players mining expansion plans:

Source: Bloomberg Energy Markets

Peer Competitive Strategies

Rio Tinto invests USD 310 million to assure a sustainable water supply for its iron ore operations in the Pilbara region of Western Australia. This will ensure the sufficient water supply for the expansion of annual production capacity up to planned 333 million tones. The coastal water supply project will be completed by mid-2013.

Second Quarter Operations Review of Rio Tinto: According to Chief Executive Tom Albanese, Rio Tintos operations largely recovered from severe weather impacts early this year, although some port and rail constraints remained. Second quarter was also characterised by continued strong prices for most of our metals and minerals but with worsening adverse exchange rates and some input cost pressures. Our growth programme was boosted by the successful acquisition of Riversdale, giving us further options to develop our tier one assets.

Rio Tinto announced a AUD 5 billion capital management programme. By July 2011, Rio Tinto shares had been bought back at a total cost of AUD 2.7 Billion. Fortescue Metals Group Ltd. reported earnings results for the year ended 30 June 2011. For the year, total revenue was AUD 5,431.1 million compared to AUD 3,384.7 million a year ago. EBIT was AUD 1,764.8 million or 56.7 cents per share compared to AUD 954.5 million or 31 cents per share a year ago. Fortescue Metals Group Ltd. announced the resignation of Mr. Ian Cumming from the board of directors. Mr. Cumming joined the Fortescue board as a non-executive director in August 2009 representing the interests of Leucadia National Corporation. The company also announced that Fortescue's Chief Executive Officer, Mr. Neville Power, has accepted an invitation to join Fortescue's board as an executive director. Newcrest Mining Ltd. reported earnings results for the full year ended June 30, 2011. For the period, the company reported that underlying profit was AUD 1,058 million against AUD 776 million a year ago. Sales revenue was AUD 4,102 million against AUD 2,802 million a year ago. EBITDA margin was 50% against 52% a year ago. EBIT margin was 38% against 41% a year ago. Sales revenue was higher due to the inclusion of the former LGL assets from September 2010, in addition to the commissioning of Hidden Valley, increases at Cadia Valley and Gosowong, and an increase in the gold copper and silver prices. The company announced final dividend of 20 cents per share and special dividend of 20 cents per share for the full year ended June 30, 2011.Newcrest Earnings Guidance: For the fiscal year 2012, the company expects gold production in the range 2.775 - 2.925Moz (3% - 8% increase from fiscal 2011). The company expects capital expenditure in the range AUD 2,000 to AUD 2,200 million and exploration spend in the range of AUD 160 million to AUD 170 million. The company expects silver production in the range 2,500 - 2,750 kilo ounce and total copper production in the range of 75 - 85 kilo tons. For the fiscal year 2013, the company expects gold production in the range 2,950 - 3,100Million ounce. The company expects capital expenditure in the range AUD 2,000 to AUD 2,200 million and exploration spend in the range of AUD 160 million to AUD 170 million. The company expects silver production in the range 2,500 - 2,750 kilo ounce and total copper production in the range of 85- 95 kilo tons. The company plans to spend around AUD 9 billion in capital expenditure over five years.

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