BHP Billiton: Hold On For The Roller-Coaster Ride Ahead

| About: BHP Billiton (BHP)

A proud saying signifies the glory days of the Raj: "The sun never sets on the British Empire." One can properly say today that "the sun never sets on the BHP Billiton (NYSE:BHP) empire" considering that its mines and concessions girdle the globe. South Africa, Chile, Indonesia, Mongolia, Colombia, Gabon, Ecuador, India, Australia, Liberia and over a dozen other countries host a BHP Billiton presence. Somewhere or another in the Billiton empire, the sun shines overhead.

It's not only about the geography: this company is so diversified that it would be a mistake to think of it as a metals mining or extraction company. It mines for and extracts gold, but also smelts alumina. It does carbon as lowly coal, and it does carbon as precious diamonds. It mines for various ores, but also explores for oil and gas. It's into prestigious titanium and also into humble potash. Just as AngloGold may be called a "gold stock," BHP Billiton can be called a "multicolored" stock.

All that said, it may still surprise you to learn that BHP Billiton is a Fortune Global 500 company. It is No. 159 on the Global 500. And why not? This behemoth was birthed by the union of two corporate giants in 2001: Australia's BHP and the United Kingdom's Billiton.

For all its diversity, recently the news surrounding BHP Billiton has been all about iron. Iron ore comprises a significant slice of BHP Billiton's business; the company produces approximately 40 million tonnes of ore per quarter and the stock price's recent turbulence can partly be attributed to its iron ore misadventures in China. China, a voracious consumer of iron for manufacturing the tonnes and tonnes of steel it uses and exports, anticipates a slowdown in growth. Beijing stated that the country's growth target for 2012 is 7.5%, a significant decrease from 9.2% only last year. Analysts said: "That means less consumption of steel and that means lower demand for iron ore!" The knock-on effect was felt on iron ore prices and that is one reason BHP Billiton's stock slid. Days later the company's 25-year top man in iron ore was gone, having made a few downbeat comments about his sub-sector. With a company with its finger in as many pies as BHP Billiton, if it's not one thing, it's another.

But this "if it's not one thing, it's another" principle also works in this giant's favor. BHP Billiton suffered a double whammy on the iron ore front: Slackening demand in China plus weather-brought disruptions affecting mining operations in Australia meant a drop-off in production to go with the decrease in demand. Within 24 hours the news made a U-turn as "another" thing happened: BHP Billiton announced that its quarterly iron ore production in Australia jumped by 14% compared to the same (first) quarter of last year. These numbers were good and BHP Billiton's shares in the Australian market got a shot in the arm: They rose to $34.65, a gain of 1.46%.

Wait a day and what do you hear? China's national steel production has risen by nearly 4% from last year, and the benchmark import price has increased by $15/tonne and is at a six-month high. The outlook for iron ore is far from bleak.

A lesson is to be learned from these facts. Unless you're an active day trader or an arbitrageur, you should be wary of buying or dumping a stock like BHP Billiton on tidbits of good news and bad news. Otherwise you'll be buying and selling BHP Billiton every two days, sometimes even twice a day.

Indeed, the same event can bring good news and bad news for a company like BHP Billiton. For instance, some recent good news is that the company finds itself in the catbird seat where LNG in Australasia is concerned: It has made new gas discoveries and is also a co-equal partner with Exxon Mobil in the Scarborough gas field. At the same time, the bad news is that it will have to cough up $5 billion to develop the field and be able to extract gas!

What this brings us to is that simple truism: It costs money to make money, yet BHP Billiton's debt-to-equity ratio is a mere 0.85. This suggests a strong balance sheet and unusual health and self-sufficiency for a mining and extraction company.

The sticking point is not the company's financials, but rather its apparently unpredictable stock price. Factors that can cause mining and metals giants' stock prices to swoon are manifold. For the fainthearted whose nerves are jangling at BHP Billiton's iron ore woes, how about these tidbits of news:

Mining giant Anglo American (OTCPK:AAUKY) has sunk billions of dollars into an iron ore mining project in Minas Gerais, Brazil. Indeed, it is Anglo America's biggest investment bar none. Now, a judge has suspended the miner's license and with it suspended the entire project. Anglo American will now be tied up in the courts. "Legal fees" is set to appear as an increasingly fat line item on its financials.

Vale (NYSE:VALE) is the world's largest iron ore producer and between it, BHP Billiton, and Rio Tinto, they just about have a lock on international iron supply. Now Vale has gone and built white elephants that have hurt its bottom line. Iron ore has been shipped on "Capesize" vessels, which can carry about 133,000 tonnes of iron. Vale ordered and took delivery of "Valemax" vessels, which treble the deadweight on board and cost over $100 million. However, these Valemaxes "have been drifting aimlessly since May because China, by far Vale's biggest customer, has so far only granted one vessel port entry and has since banned anything over 300,000 tonnes."

The news from the other major, Rio Tinto (NYSE:RIO), is far more humdrum. Rio upped its iron ore production by 9% to 45.6 million tonnes. But that was below analysts' expectations. Coupled with weakness on the copper and coal fronts, Rio's "shares dropped."

So, BHP Billiton's woes are not unique. Indeed, other mining giants may have bigger headaches. Let's summarize: Down on coal, up on LNG. Down in China, up in Australia. Roller coaster, anyone?

Even a giant like AngloGold can be subject to negative outlooks and stock downgrades if the value of its primary focus, so obviously reflected in its name, declines. BHP Billiton, however, has its tentacles spread around the world and inside the earth. The octopus analogy is an apt one: If you cut off one or two tentacles, no problem ---the octopus is still left with six or seven. And it will soon regenerate the lost tentacles. And that is the key because that's the way it is with BHP Billiton.

So, what is next for BHP Billiton? To answer that question, let's ask another: What's next for a brand-new jet that's cruising at 35,000 feet on autopilot? More of the same, and the same is the case with BHP Billiton. At the end of this somewhat ambivalent report, what's the verdict? It's a "hold" -- and also hold on for the roller-coaster ride.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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