Like others in the mining industry, BHP Billiton Limited (ASX: BHP) delivered a very impressive set of results for its first six months of operations ending 31 December 2013. Its profit rose an incredible 83% to US$8.1 billion in the period while an underlying profit of US$7.76 billion (excludes one-off factors) was also recognised, which represents a 31% increase compared to the prior corresponding period.
While those results far exceeded the figures that the market had been expecting, there were a number of other positive points to be taken from its report which indicates that the mining giant could very well be a good investment prospect in 2014. Here are three reasons why:
Despite there being positive signs for the mining sector, the industry is still facing substantial risks and the share performance of companies relies heavily upon the sustained high prices of commodities.
Unfortunately, there is absolutely no way of knowing which direction the price of commodities will go. There is even doubt amongst the miners themselves with Fortescue Metals Group Limited’s (ASX: FMG) CEO, Nev Power, providing optimism for the future of iron ore while BHP’s, Andrew Mackenzie, has expressed his doubts as supply growth continues to exceed demand growth.
Investors must make up their own mind regarding the future of each commodity and each company. Personally, BHP represents the most attractive prospect from the industry for me given its level of diversification compared to its competitors Rio Tinto Limited (ASX: RIO) and Fortescue which focus heavily on iron ore. While the steelmaking ingredient is still BHP’s primary revenue generator, it also heavily focuses on coal, copper and petroleum.
Like its competitors, BHP has been heavily ramping-up production levels of its core commodities. Over the six months to 31 December, the company increased production by 10% whereby records were achieved across three commodities. Western Australia Iron Ore (WAIO) produced 108 million tonnes of the steelmaking ingredient (the company’s greatest revenue generator) while Queensland Coal boosted its annualised production rate to 68 million tonnes through the December quarter. Meanwhile, petroleum liquids production also jumped 9% to 50 million barrels of oil equivalent.
By increasing production of its core commodities, economies of scale are achieved. When combined with cost-cutting initiatives as well as productivity improvements, greater margins are recognised leaving BHP less susceptible to falling commodity prices.
After years of below par results, investors have been pressuring the miners to start distributing greater amounts of wealth amongst shareholders. While the dividend yield currently stands at roughly 3.1% fully franked, there is also a great possibility that a share buyback program could be implemented by the end of the year which would apply upwards pressure on the share price.
My primary reason for preferring BHP over its competitors is the level of diversification built into its operations. Although Rio Tinto and Fortescue would be bigger beneficiaries should iron ore’s price remain strong, BHP is a much safer alternative and I would be far more comfortable holding it in my portfolio.