BHP Billiton (BHP) is an outstanding diversified mining company. Mining stocks have taken a hit due in large part to the decline in gold and copper prices, and the bears are strong in the sector. But I am still bullish on BHP and the following will show why.
When I compare BHP to some of its core competitors I begin to see how attractive its stock is. BHP has seen its stock drop from around $76 per share at this time last year to about $69 today, with a 52 week high around $82, and a low around $60. Rio Tinto (RIO) has seen its stock drop from around $54 at this time last year to around $47 at the present. It has a 52 week high around $63 and a low of $41. While Fortescue Metals Group (FSUMF) has seen little volatility, being at just under $5 per share this time last year, and now at just over $4, with a 52-week high of almost $6 and a low of $3.
BHP has had the least reduction is share price, and its PE ratio look strongest of the group. The company also maintains the best dividend per share of the group. Both Rio and Fortescue are producers that are heavily dependent on iron ore mining. This makes both particularly vulnerable to steel demand. The diversification of BHP's mining portfolio makes it a much more attractive investment. So even in a declining sector, BHP as the more diversified of the miners has weathered the storm the best, while the pure iron ore miner Fortescue is suffering the effects the most. The key for all three companies is Chinese demand for steel. As the Chinese economy heats up again, steel demand will follow, and will produce a boon for all, but BHP will capitalize the most.
The problem is that iron ore is not forecasted to increase very much even with higher Chinese demand. Australia's official forecaster does is projecting that prices remain on the low end. This might prove devastating to Fortescue. The projection is that the slump in prices will drag the value of the iron ore down by 16 percent. Another negative drain on the trade is the strong Australian dollar. If the Australian dollar would decline by 10% on the forex markets it would represent an addition $19 billion in iron ore exports in the current year.
This drag on the iron ore market has meant that BHP, Rio, and Fortescue have all shrunk capital expenditures. All three companies have cancelled or postponed infrastructure projects, and reduced holdings in high operating cost assets. The need for mining companies to raise capital and decrease costs is very high. The smaller companies such as Rio and Fortescue are going to have serious trouble going forward. One important distinction between these three companies is that BHP can still turn a profit if iron ore prices remain stagnant.
The diversification of BHP is a very important component in evaluating the company. While iron ore occupies a large part of its strategic assets, the company has much invested in gold and uranium, among other commodities. Gold has been solid recently even with the current slowdown because of price sluggishness. The stock of Goldcorp (GG) is proof that investors view gold to remain solid. Goldcorp's stock closely follows the value of gold. It has risen almost 30% after hitting a low of $32 this summer, during the low point of gold's price. As gold inches upward BHP will benefit.
Another fact working in BHP's favor is the thinking that copper's price will bounce back strong in the coming months. China's demand for copper declined significantly during their economic slowdown. But that slowdown seems to be over and the Chinese economy is heating up.
Investors have shown that they believe copper is on the rise. Southern Copper (SCCO) has reached a 52 week high on the heels of investor confidence in copper. This company's stock closely follows investors' confidence in copper. As it goes up I expect copper prices to go up as well. Copper occupies a significant portion of BHP's revenue; second only to iron ore. With copper coming on strong, BHP's stock is set to rise.
BHP Billiton is the world's largest publicly owned miner. It has market dominance, a strong balance sheet, reliable cash flow and increasing earnings. One of the keys to its success is a disciplined approach using proven strategy. It offers unparalleled opportunity for long-term investment, pays a handsome and growing dividend, and is currently undervalued.
In downturns of the business cycle, it has the economic power to make huge investments in future production. It favors large, scalable, long lived projects. Its diversification of products and geographies adds stability to its cash flow and profits. Unlike some of its competitors, BHP has most of its major assets in low risk countries such as Australia, Canada and Europe.
As copper and gold rebound from recent slowdowns, BHP is in great shape to capitalize. The stock is currently trading around $69, which is near its 52-week low of $60. As copper demand increases, fueled largely by demand in China, the stock will top its 52-week high in the early part of next year. The stock could become a huge growth stock in 2013 if the price of iron ore can increase at all. There is a decent chance that it will as worldwide demand for steel will increase if the global economy shows steady growth. BHP Billiton is a buy no matter what.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.