BHP looks like a buy again

NOW BHP has walked away from the world's biggest corporate takeover, abandoning its $135 billion bid for rival Rio Tinto, a list of analysts have resumed coverage of the mining major with a "buy" recommendation Merrill Lynch says BHP has a large portfolio of long-life, low-cost assets with attractive high-return growth options that are unparalleled in the market. "We believe BHP should be core to any global mining portfolio," it says in its note restarting coverage. "In a weak economic environment, BHP's lower operational and financial leverage should result in the shares outperforming those of higher-cost, more financially geared peers." BHP cited the unprecedented financial global conditions and Rio's large debt as the two main factors for the backflip on its push for the merger, at one time labelled by the world's largest miner as a "deal for all seasons". BHP will take a $450 million exceptional charge from deal-related costs. Separately, BHP took a $US1.5 billion ($2.27 billion) post-tax below the line write-down on Ravensthorpe/Yabulu nickel operations, which Merrill said was disappointing. At its AGM last week, two days after it scrapped the Rio bid, BHP was questioned on the possibility of taking another look at its rival in a year's time. It played this down by saying it expected a reasonably long recession that could make assets in the industry cheaper. BHP is well positioned in a balance-sheet sense for this stage in the cycle, having net debt of only $US6 billion, and Merrill has calculated that it could be cash positive by the end of 2009. "BHP's No1 priority in volatile markets is to keep this strong balance sheet, so we expect to err on the side of conservatism," Merrill said. BHP's balance sheet could allow it to reinstate its $US10 billion buyback, suspended on February 6, the date of the Rio bid. Merrill expects BHP to buy $US6 billion of stock in 2009 as the price is at very attractive levels.