Is BHP a buy?

Cost-cutting and a longer term focus make this company more appealing, but is it worth the risk?

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Although the mining industry still faces uncertain times as commodity prices remain volatile and international demand continues to fall, BHP Billiton (ASX: BHP) is setting itself up for a brighter future through cost-cutting and a more shareholder-friendly approach to business.

BHP has been the darling of investors over the last decade, but its shares have been on the downwards trend for the last two years. As the intensity of the Australian mining boom began to decline, so did BHP’s profits – as was the same with its competitors such as Rio Tinto (ASX: RIO), Fortescue Metals Group (ASX: FMG) and Arrium (ASX: ARI).

With the appointment of BHP’s new CEO, Andrew Mackenzie, earlier this year however, the mining heavyweight has refocused its attention from rapid expansion towards a more sustainable method of operating a business. Recognising the decline in global activity and demand, Mackenzie has announced his intentions to cut costs from a peak of more than $22 billion to just $18 billion by the end of next year – with further savings to be made thereafter.

Already having offloaded a number of underperforming mines and assets, BHP yesterday announced that it had sold a combined 15% of its stake in its Jimblebar mine to Japan-based ITOCHU (8%) and Mitsui & Co (7%) which frees up an additional $1.5 billion in cash, and highlights the potential of the area to give excellent returns.

Last month, Mackenzie told shareholders that each of the company’s divisions must “stand alone” and “vie against other operations for future investment”, indicating that the days of unnecessary capital expenditure are over, and that a new focus will be put onto achieving greater productivity and improving shareholder returns.

As BHP relies predominantly on international demand for its revenues, a falling Australian dollar will significantly contribute towards greater profitability. Meanwhile, recent Chinese data has caused a rebound in the price of iron ore to around US$120 per tonne, although experts are predicting they will once again fall to around US$110.

Foolish takeaway

Currently sitting at $32.45 per share, BHP is more appealing than Rio Tinto and Fortescue as it doesn’t rely so heavily on the sale of iron ore for revenue, and has more diversified operations. In saying that, however, the mining sector is experiencing too much volatility to justify the investment of hard-earned money. Whilst BHP’s cost-cutting is certainly a good move toward long-term sustainability, it is well worth sitting on the sidelines until that volatility begins to subside.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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