Freeport Vs Bhp

Definition of the task

Our team has been approached by a group of potential investors and financial

institutions in order to evaluate the prospective of BHP Billiton and Freeport McMoran. The

basis of our study is to provide detailed examination of the possibility to invest in one of the

mentioned companies and also to lend funds to one of them. Our analysis aims to provide

detailed answers to the questions posed and to facilitate the selection process.

Recommendations

During our examination of the companies, the industry and the projections for the

future we have encountered many problems and evidences that reveal which company serves

better the interest of the investors and lenders. BHP Billiton is the market leader by market

capitalization and Freeport McMoran is fifth. However, during the detailed ratio analyses for

the current performance and the past 5 years our team have found evidences that back up

Freeport as a better choice for lending funds. There are various reasons that are examined in

details in this research, but one of the main factors is that Freeport has better liquidity than

BHP Billiton. This is very important indicator for every lender and we believe that the

company is the better choice.

In terms of potential investment both companies possess strong background and

potential. In fact, BHP is a more diversified company, while Freeport relies solely on copper

and gold. The size of Freeport is not that easily comparable to BHP, but in fact many

evidences reveal that it is operated more efficiently and gives better prospective. Therefore,

we suggest that Freeport is also a better choice for investing.

The industry provides evidence that both BHP and Freeport have similarly performing

stock prices and they are moving together. There is a slight valuation advantage of BHP

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Billiton, but despite the market dominance and potential takeover of Rio Tinto the company

size is a weakness in a sense for the performance. Freeport McMoran is doing more efficient

work, despite its smaller size and potential. Sales growth and historical performance support

this statement and we are carefully examining the prospects in our analysis.

Potential takeover of Rio Tinto would create the largest metal mining company in the

world (if the authorities approve such deal), but this would create a burden for the financial

performance of the company and the efficient use of resources and potential. We believe that

seemingly better choice of BHP Billiton is not the best of interest for the investors’ longterms

plans and therefore we suggest Freeport, because of a model that suggest that the shares

of the company are significantly undervalued and are expected to increase.

In conclusion, our analytical team believes that with the following detailed analysis we

give enough proofs that Freeport McMoran is the better choice for both investors and lenders.

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TABLE OF CONTENTS

I. COMPANY OVERVIEW 5

A. BHP Billiton 5

B. Freeport McMoran 6

C. Comparison and Market Capitalization 7

II. INDUSTRY ANALYSIS SUMMARY 8

A. Steel Markets 8

B. Prices of Iron ore 8

C. Prices of Gold & Silver 9

D. Prices of Copper 10

E. Prices of Aluminum 11

F. Other factors 12

III. RATIO ANALYSIS 13

A. Liquidity Ratios 13

B. Asset Utilization Ratios 14

C. Capital Structure and Solvency Ratios 14

D. Operating performance Ratios 15

E. Valuation Ratios 16

F. Dividend Ratios 17

G. Growth rates Ratios 17

H. Tables of Ratios 18

IV. TECHNICAL ANALYSIS 19

A. Bollinger bands 19

B. Relative Strength Index 19

C. Moving averages 20

D. Volume 20

V. REGRESSION ANALYSIS 22

A. Multiple Regression BHP Billiton 24

B. Multiple Regression Freeport McMoran 25

VI. FINANCIALS 27

A. Balance Sheet 27, 29

B. Income Statement 28, 31

C. Cash Flow Statement 28, 31

D. Quality of Earnings 32

E. Altman Z-score 34

F. Residual Income Valuation Model 36

G. Discounted Cash Flows Model 40

VII. FINANCIAL STATEMENTS 42

A. Balance Sheet 42, 47

B. Common Size Balance Sheet 43, 48

C. Income Statement 44, 49

D. Common Size Income Statement 45, 50

E.

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