Over the last year, the share prices of the large cap mining companies have declined on average about 30%. The world's largest mining company, BHP Billiton (NYSE:BHP) sets the standard by which other mining companies are evaluated. In the world of ore mining, larger is typically better, due to the large amounts of capital required to locate and develop ore bodies. The question for investors is whether one of the large mining companies has the resources or business plan to stand out from the others.
Investors may note that the market capitalization for BHP Billiton shows up with very different values on the different financial websites. The variance is due to the organizational structure of the company. BHP is a dual-listed company. BHP Billiton Limited is an Australian company trading in the U.S. as BHP and BHP Billiton Ltd. is a U.K. company and trades in the U.S. under the BBL stock symbol. The BHP website states the two companies:
... Are managed and run as a single economic entity. The companies have a common Board of Directors and management team. Shareholders in BHP Billiton Limited and BHP Billiton Plc have equal economic and voting rights, as if they held shares in a single company.
As to the market cap question, the market cap of the Australian listed shares is about $117 billion - one of the numbers you may see listed. The total value of both shares is the more commonly found $190 billion market cap for BHP.
Of the major global mining companies, BHP Billiton, Rio Tinto (NYSE:RIO) and Vale S.A. (NYSE:VALE) produce iron ore as their primary product, and all three have market values over $100 billion. Freeport-McMoRan (NYSE:FCX) could be considered as the fourth major global mining company with a $35 billion market cap. Freeport-McMoRan primarily produces copper. Most of these companies produce other mineral or natural resource products, which may be a deciding factor when selecting which stocks are the best investment candidates. Freeport-McMoRan is also a significant producer of gold. The primary secondary product for Rio Tinto is aluminum. Vale is the most focused company listed here, with the bulk of production in iron or and iron pellets. BHP Billiton has the broadest product list of the companies discussed here, but crude oil is now the company's number two product.
Several inter-related, macro-economic factors affect the results of the major mining companies. All of the discussed companies appear to be well managed and produce attractive gross profit margins and free cash flow levels. Bottom line results depend on market prices for the commodities that the companies produce and sell - in this case, the focus is on iron ore. Iron ore prices depend on the global production of steel and the projected production in relation to the amount of iron or being produced. In recent years, the economic growth of China and the resulting demand for steel to build that growth has been the driving factor in iron ore profitability. On the other hand, the share prices of the mining companies are primarily affected by the market perception of economic growth around the world, with an emphasis on China. In 2011, the mining companies produced record levels of revenue and profits, yet the share prices declined. The investment markets were coming out of the mining stocks due to lower growth rate forecasts from China and the European economic problems.
For the long-term, the economic factors are very positive for BHP and the other mining companies. The emerging markets including China, India and Brazil will continue to grow at attractive levels. China's steel consumption and auto production rates are still well below those of established economies like the U.S., Europe and Japan. New sources of iron ore or copper will be more expensive to develop and most likely less productive than the assets owned by the large mining companies. Any new production will probably require high market prices to be profitable and if prices fall, the excess production will drop out of the global system. The result of these economic factors is that mining companies can expect ore prices to trend upward and ore consumption to grow - just at rates slightly slower than over the last decade.
In the short-term, a couple of factors set BHP Billiton apart from the other companies discussed here. The primary factor is the company's growing crude oil production. In the first half of the BHP 2012 fiscal year, energy products accounted for 29% of earnings before interest and taxes - EBIT. As the markets roll further into 2012, those markets will realize the profit results for the company are sustainable and the future growth prospects look attractive. BHP's stated dividend policy is to steadily increase the payout in U.S. currency. A strong dividend helps investors get through the inevitable down cycles of commodity production. The first half of 2012 may be the best time for many years to pick up shares of BHP and the other large mining companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.