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BHP is the safest bet for 2014

While the first-half of 2013 saw shares in the miners fall in value, a combination of successful cost cutting efforts, a resilient iron ore price and positive signs from China saw a rise in investor sentiment. However, experts are still warning investors to remain cautious of the industry, suggesting that they should consider larger and more diversified miners over single-commodity companies.

The Australian Financial Review quoted Mathew Hodge, Morningstar’s sector head of basic materials and energy, as saying: “Commodity prices can be extremely volatile so investors should focus portfolios on miners with sustainable competitive advantages… and the ability to generate good returns in almost any metal price environment.”

Deutsche Bank prefers companies such as BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) due to their low-cost operations and higher levels of diversification. In addition to these, Morningstar also recommends oil and gas company Woodside Petroleum (ASX: WPL).

Although I also remain cautious of the sector, my favourite of the three alternatives is BHP. The miner is heavily exposed to iron ore (and is ramping up its production levels) but is not as reliant on the steelmaking ingredient as Rio Tinto or Fortescue Metals Group (ASX: FMG), which is a pure iron ore play.

BHP and Rio Tinto both believe that while the short-term outlook remains volatile, long-term demand for commodities will continue to increase due to emerging market growth, while both are also heavily cutting operating costs.

BHP is also investing heavily in its Potash division. Potash is a fertiliser ingredient which the miner believes holds outstanding long-term potential given the growing global population and could one day become the company’s ‘fifth pillar’.

On a negative note however, BHP’s earnings could be restricted in the near term by weakness in its aluminium, manganese and nickel businesses. None of these three commodities are expected to recover in 2014.

Foolish takeaway

Given its higher level of diversification than the other miners, BHP would be the safest bet going into 2014. While it may not benefit as greatly as Rio Tinto or Fortescue if iron ore remains around today’s price, it is also not as susceptible to a sudden fall in value.

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

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