Is BHP Billiton a Good Stock?

Michael Teague |

The Australian mining and energy company BHP Billiton (BHP) is both the largest company in the metals and mining industry, and with a market cap of nearly $328 billion, the 22nd-largest publicly-traded company in the world.

The company has existed in its current form since 2001 after a merger between Australia’s Broker Hill Proprietary Company Ltd., and the Anglo-Dutch company Billiton Plc, both of whom have histories that stretch back to the mid-late 19th century.

Billiton was first associated in the Netherlands back in September 1860, and worked domestically in tin and lead smelting, as well as making mineral rights-acquisitions throughout the Dutch Indies archipelago off of the coast of Sumatra. In the 1940s, the company mined bauxite in Surinam and Indonesia, and was itself acquired by what is now 

Royal Dutch Shell ($RDS.A) before being passed on to South Africa’s Gencor Ltd., who took on only Billiton’s mining segment.

The 1990’s were a busy decade for Billiton, as the company expanded operations into disparate regions across Africa, South America, Asia and Australia, while establishing a strong presence in the mining of numerous metals and minerals such as nickel, aluminum, coal, and titanium.

As for the Broken Hill Proprietary Company, otherwise known as “the Big Australian,” the firm was incorporated in 1885 on the strength of prospects from its silver and lead mines at Broken Hill in Western Australia. By 1915, the company had moved into the manufacture of steel after the discovery of both new ore deposits around Australia, as well as well as a new and more efficient chemical process by which steel extraction was made much easier, and thus more profitable.

BHP Billiton’s entry into oil originates with the Broken Hill half of its family tree, and began back in the 1960’s, and has become an increasingly important segment for the company up to this day. But diversification did not stop there, as BHP moved into Chilean copper mining with at the Escondida mine, diamond mining at the Ekati mine in Northern Canada, and a copper mine in Papua, New Guinea. Eventually, the original steel business out of which the company had grown would become insignificant, and was eventually spun-off into BlueScope Steel shortly after the merger with Billiton.

The 2001 merger that resulted in the creation of BHP Billiton and the subsequent shedding of the steel business did not however disrupt the continuity of both original companies’ desire to diversify operations and holdings. In 2005, BHP Billiton launched a successful $7.3 billion bid for WMC Resources, a rival Australian company that mined copper, gold, uranium, and nickel as well as running a fertilizer plant.

In 2007, the company mounted what looked as though it could become a hostile takeover bid for its current second-place rival, the Brazilian company Rio Tinto Plc (RIO) , but abandoned the effort once the ramifications of the global financial crisis began to manifest themselves in earnest the next year. The crisis would impact BHP Billiton significantly, forcing the company to close down and/or sell off operations throughout Australia and around the world. But this proved to be a temporary trend for the company, as it bounced back at the beginning of 2010 to make its first significant entry into non-hard commodities with the $320 million purchase of Athabasca Potash.

More importantly, however, the Athabasca acquisition was important for the fact that it signaled the company’s willingness to diversify into new and more reliably profitable commodities. The early 2011 acquisition of mineral rights to Chesapeake Energy’s Fayetteville, Arkansas shale leases, as well as its over 400 miles of pipeline in the state. Later that same year, the company would go on to acquire the US firm Petrohawk Energy for over $12 billion. Both acquisitions have made BHP Billiton a major producer of shale gas in the US, though the company has so far limited its American operations solely to production.

At the present, BHP Billiton runs operations in over 25 countries around the world, dividing itself into 10 main Customer Sector Groups: aluminum, base metals, diamonds, coal, iron ore, manganese, minerals, petroleum, stainless steel, and uranium. It runs facilities in South and North America, Africa, Australia, and Asia, and has presence in Europe via one oil and gas field in the United Kingdom.

In recent years, the pattern of shedding underperforming assets and acquiring new and more promising ones has more or less worked for BHP, even if the acquisitions themselves have not always been successful, such as was seen in the case of Rio Tinto, or in the failed 2010 attempt to pick up Canada’s Potash Corporation of Saskatchewan.

The last three or so years have seen the company shift focus increasingly to shale gas and oil production, but has also greatly enhanced production of iron ore in expectation of a sustainable growth picture out of China. The world’s most populous nation is BHP’s single biggest customer, as well as being the world’s largest consumer of iron ore. The production report released by the company last month showed a 14th consecutive quarter of iron ore production, but also indicated an increase in emphasis on copper production, following an industry-wide trend that has resulted from booming growth in China as well as other emerging markets throughout Asia and the world.

The industrial metals and minerals industry has a combined market cap of $33 trillion, of which BHP controls some ten percent. While the price/earnings ratio of the industry averages out to 60.9, BHP’s is about one fourth of that, trading at just shy of 16 times earnings. Furthermore, the 30 percent operating margin it currently maintains, as well as its incredibly low debt/equity ratio compared to the industry average, proves that the company knows how to keep enough cash around to manoeuver shifts in the market.

The company’s most recent earnings report showed BHP heading for trouble as the last few years of investments in greater iron ore output are butting up against weaker Chinese demand. Indeed, profits were hit hard by the lower iron ore prices that have resulted from oversupply. That said, it must be remembered that the slowdown in growth out of China that has had markets on edge recently was a slight one, from 7.7 percent to 7.5 percent for the month of July, and the company seems confident that demand will be sustainable in the long-term.

Meanwhile, copper trends seem to support a more optimistic picture. Last week saw global stockpiles over 3 percent lower in a month-long trend that has sent prices in the opposite direction. The largest mining companies, including not only BHP Billiton, but also Rio Tinto and Vale SA (VALE) , are set to take advantage of this situation, as the consistently lower surplus has provided a counter-argument to predictions of less demand, as well as having provided support to recent higher prices.

But the company’s most valuable asset at the moment may be the one that receives the least attention, and that is its involvement in the production of shale oil and gas in the US. BHP has placed itself firmly in the flight path of America’s shale boom in recent years, with presence in both the Permian and Eagle Ford formations in Texas, as well as the aforementioned Fayetteville Shale in Arkansas, not to mention in Haynesville, Louisiana, and even the Gulf of Mexico.

While US oil majors are struggling with production difficulties, BHP Billiton is picking up the slack. The company has yet to announce plans to ship its own oil and gas from the US, but could very easily build up its own port. Or, it could simply continue to sell its product to its peers in the US. Involvement in the US shale explosion has also put the company in a better position to exploit shale reserves back home in Australia.

The global commodities markets have been volatile during a year when economies worldwide have been laboring under a number of uncertainties. BHP’s performance reflects this, as the stock is currently down over 17 percent year-to-date. However, and unlike many of its large competitors in the industry, the company’s wide-reaching operations, and its surprisingly nimble adaptation to challenges and setbacks, make it likely that the down times are relatively short ones, which is saying a great deal for a firm with such width and breadth of exposure to hard commodities.

 
 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
RIO Rio Tinto Plc 41.15 -0.97 -2.30 3,853,470
VALE VALE S.A. American Depositary Shares Each Represen 8.78 -0.16 -1.79 26,109,176
BHP BHP Billiton Limited 38.48 -0.42 -1.08 2,059,742
LQRCF Black Mammoth Metals Corp 0.04 0.00 0.00 0
RDSA Royal Dutch Shell Plc ADR Sponsored Repstg A Shs n/a n/a n/a 0

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