By Chris Shaw

The June quarter production report of BHP Billiton ((BHP)) released yesterday contained few major surprises according to most in the market, with aluminium and copper numbers largely as expected and petroleum slightly better than forecast.

The one stand out result for UBS was the metallurgical coal division, the 51% increase in shipments in quarter-on-quarter terms coming in 24% above its forecast. These shipments were offset by higher petroleum exploration costs, so the end result was minor cuts to the broker's earnings estimates.

Deutsche Bank made similar small cuts to estimates for FY10, while the broker also trimmed its FY11 numbers by almost 6% to reflect expectations of weaker copper and crude oil production next year. The latter is expected thanks to the current drilling ban in the Gulf of Mexico, which is anticipated to cause some project delays.

The overall impact of Deutsche's earnings forecast changes was minimal, as net present value (NPV) for BHP declined by just 1% to $46.76. It was a similar story from Citi, where earnings estimates were trimmed by 3-5% through to FY12 but there was no corresponding impact on the NPV estimate of $47.50.

For Citi this means BHP remains a Buy, as the stock is currently trading at a 20% discount to its NPV estimate. This is excessive in the broker's view, as while the global economic recovery is likely to be volatile it should prove to be sustained for the longer-term.

The other attraction Citi sees is with BHP expected to return to a net cash position in the second half of 2010, a share buyback could again be on the cards early in 2011, especially now the Resources Super Profits Tax (RSPT) has been replaced by the Minerals Resources Rent Tax (MRRT) in Australia.

UBS agrees BHP Billiton offers value at current levels, as on its numbers the shares are trading on less than 10 times earnings in FY11 and at a more than 30% discount to its valuation-based price target. According to the FNArena database UBS currently has the highest target for BHP at $53.00, almost 10% above the average target of $48.46.

Credit Suisse is at the bottom of the price target range at $45.00, but this still implies solid upside from BHP's current share price level. The issue for Credit Suisse is one of relative attractiveness, as while BHP is trading well below its target the broker sees scope for some headwinds related to the Gulf of Mexico and the potential for the iron ore joint venture proposal with Rio Tinto ((RIO)) to not proceed.

In such an environment Credit Suisse suggests Rio Tinto offers better relative value, as it has an easier path to expand its iron ore output and also has the Oyu Tolgoi project as a potential positive catalyst. Credit Suisse's earnings forecasts back up its view, as it estimates while BHP is on an undemanding forward earnings multiple of 8.7 times, Rio Tinto is on a multiple of 7.4 times.

Overall the FNArena database shows BHP is rated as Buy six times and Hold three times. Shares in BHP today are slightly higher and as at 1.20pm the stock was up 16c at $38.91. This compares to a price range over the past year of $35.58 to $44.93 and implies upside of better than 24% to the average price target according to the FNArena database.

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