Australia | Sep 07 2007
By Greg Peel
Rumours of consolidation in the global diversified metals sector are becoming as common as Sydney city roadblocks so grab your salt shaker. The latest is that BHP Billiton (BHP) will team up with Brazil’s Companhia Vale do Rio Doce (CVRD) to acquire Rio Tinto (RIO) with the intention of breaking it up and splitting the spoils between them.
The news sent all the stocks involved rallying in Australia, London and New York from yesterday afternoon, and rekindled interest in the commodities space.
From all the rumours that have emerged over recent months, the only truism is that Rio has taken over Alcan. This sparked speculation that BHP would retaliate by snaring Alcoa, but the news had gone cold on that front. Similarly, the parties involved have denied this latest street talk.
But there is nothing spurious about the news that Woodside Petroleum (WPL) has initiated negotiations on a huge deal that could add up to $12 to Woodside’s value.
Woodside has signed a “key terms agreement” with PetroChina to potentially supply 2-3Mt per year of LNG from Woodside’s planned Browse project, commencing somewhere around 2013-15. Indications are that Browse could be taken to a 14Mtpa facility. In the words of Citi’s analysts, “This is a huge deal”.
Credit Suisse suggests that the delivery of Woodside’s development portfolio is key to the ultimate re-rating of the stock. This latest announcement goes a step towards de-risking Browse. All analysts note that the agreement is only conditional at this stage, but that the upside potential is significant. Just how significant is a matter of conjecture. Merrill Lynch has “risked” Browse at 50% to arrive at a $3.20 valuation while UBS suggests Woodside’s share of the deal is potentially worth $11.93 per share.
Significant in the agreement is the acknowledgement that China is now prepared to accept higher LNG prices. Citi notes the LNG price has been pushing ever higher due to skyrocketing capex costs for major infrastructure projects. Without the high LNG price the projects are not viable. Citi suggests the capex for Browse could be $30 billion. Internal rates of return remain low against soaring costs so the next question is: can Woodside get the funding?
Woodside had enjoyed a 7/3/0 B/H/S ratio prior to this announcement, but Citi has decided the conditionality of the new deal requires a pullback to Hold. The analysts have also increased their risk rating from low to medium. Citi has, however, increased its target from $46.20 to $49.70. The average in the FNArena database now pushes up to $49.09, with Deutsche Bank top marker at $58.20. The B/H/S ratio now stands at 6/4/0.