Given its below-par returns in recent years and its strong long-term prospects, analysts and investors entered into 2014 viewing BHP Billiton Limited (ASX: BHP) with a rather bullish investment case. In fact, some even predicted that its returns could help drive the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) towards that lucrative 6,000 point mark.
However, conditions have yet again proven difficult for the mining sector with most of the miners having fallen in value since the beginning of the year. Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), for instance, have fallen 14.4% and 10% while BHP has dropped 6.4%. These results have largely been influenced by volatile commodity prices, whereby iron ore and copper have fallen in value substantially since the beginning of the year.
However, there are still a number of reasons to like BHP as an investment. Here are three such reasons:
1. Diversified
The miners have absolutely no control over the price of commodities. If a commodity falls in value, so will the company's margins and therefore its profits. While there is no way of knowing which direction the price of each commodity will go, diversification is necessary to spread the level of risk being assumed.
BHP is the world's most diversified miner. While iron ore remains the key focus for Fortescue and Rio Tinto, BHP also focuses on coal, copper and petroleum as part of its "four pillar" strategy. It is likely that potash, a key fertiliser ingredient, will soon become its fifth.
2. Cost Cutting
While the miner is ramping up its production levels and improving productivity, it is also heavily focused on reducing costs which will boost margins and profitability. In its half-year results, BHP's CEO Andrew Mackenzie said: "Annualised productivity led volume and cost efficiencies totalling US$4.9 billion are now embedded and this is expected to increase to US$5.5 billion by the end of the 2014 financial year."
Given these cost cutting initiatives, internal competition for project funding has heavily increased. The miner believes an average rate of return of greater than 20% (after-tax) is achievable for their portfolio of major development options.
3. Shareholder returns
After years of underachievement, shareholders have demanded greater distributions and BHP looks set to deliver. The miner has indicated that once its net debt falls to US$25 billion, it will explore options such as a special dividend or a share buyback program, although it would more likely be the latter as it is seen to be the more rewarding option for long-term investors.
The company reduced its debt from $29 billion to $27.1 billion in its first-half operations. Further cost cutting and the possible sale of a number of its underperforming assets (particularly in its nickel division) could see it hit its target by as early as August.
Foolish takeaway
Given the high level of volatility currently blanketing the mining sector, it would be wise to remain on the sidelines for now. However, there is a lot to like about the behemoth that is BHP and it would certainly have my attention if its shares fell much further.
