Diversity separates BHP Billiton (NYSE:BHP) from other iron ore miners. Where Vale SA (NYSE:VALE) and Rio Tinto (NYSE:RIO) mainly on iron ore, BHP has a four-pillar strategy, consisting of iron ore, petroleum, coal, and copper. From fiscal year 2013 to fiscal 2015, a large share of its production volume will be iron ore, but it is increasing production of other products as well.
Fiscal year 2013 to fiscal year 2015 expected production growth contribution:-
Share in production growth
Source: Company's marketing presentation
At present, iron ore supply is less than its demand. To fill this gap, iron ore miners are increasing production. Rio Tinto's production capacity is expected to reach 290 million metric tons by the first half of 2014 from its current capacity of 260 million metric tons. The company is projecting to add another 40 million metric tons by 2015. Vale is expecting to produce 312 million metric tons next year, 2% more than this year's production forecast. It plans to increase production capacity by 50% in the next five years.
BHP expects to produce 212 million metric tons next year, and it will also increase its export capacity to 270 million metric tons in coming years. With the rising global supply, the price of iron ore is expected to decline over the next few years.
Although the price decline will affect all three companies, the impact on BHP will be the least because it is less exposed to iron ore than the other two. In fiscal year 2013, iron ore accounted for 43% of its EBITDA, a much lower percentage than the 78% and 92% for Rio and Vale, respectively. If iron ore prices fall, BHP's other businesses will lead to its growth. For example, coal demand is expected to increase in Asian countries, especially India where BHP has been a major supplier for 30 years. Besides coal, the company's portfolio consists of other major energy components such as oil, gas, and uranium, which suits demand in both developing and developed countries. Through growth in its other businesses, BHP can offset the expected revenue fall due to the decline in iron ore prices.
The company is full of energy
Roughly 30% of BHP's revenue comes from China, but that nation's GDP growth is expected to lessen in coming years. Economic slowdown may affect the country's infrastructure spending and hence BHP's revenue, but the company's expansion in the U.S. shale oil and gas business, which it acquired in 2011 for $20 billion, will reduce its dependency on China. Natural gas consumption in the U.S. will increase in coming years. By 2017, about 47 gigawatt of coal-generated power is expected to be retired, increasing consumption of natural gas by 5 billion cubic feet per day. Along with power plants, industrial usage of natural gas is also expected to increase. To capture this growth, BHP will spend about $4 billion a year on this business, and the company expects to start generating cash from 2016 and by the end of the decade have it contributing about $3 billion a year.
Although natural gas demand is high in the U.S., supply is also increasing at a similar rate that may lead to a surplus. The oversupply is expected to be exported to the Asian emerging economies within the next three years. In Asia, energy demand is expected to increase by two thirds by 2030. BHP expects that gas export from North America will fulfil 11% of the Asian demand. It is also expecting that 25% of the demand will be fulfilled by Australia. Since BHP has gas exposure in both regions; the company's gas business has a potential upside.
BHP Billiton is on the path of growth. The company is increasing its iron ore production just like competitors Vale and Rio Tinto. However, because of rising global supply iron ore prices are expected to fall. If we compare these three miners, BHP has the minimum iron ore exposure, due to its diversified portfolio. Therefore, it will be less affected by the iron ore price fall.
BHP is also expecting good returns from its U.S. shale business. The company will spend about $4 billion a year in it, but this business will start generating cash flow from 2016 and may generate about $3 billion of revenue by the end of this decade. Given BHP's prospects, I recommend a long position in this stock.