Following on from a decade of enormous growth, Australia’s mining industry has since acted as a drag on the overall Australian stock market, whereby concerns regarding future growth in developing economies such as China, declining commodity prices, poor cost-management and unnecessary spending have seen the shares of Australia’s largest miners plunge since early 2011.
However, although there are still strong headwinds facing the industry, there are a number of reasons to like BHP Billiton Limited (ASX: BHP).
Firstly, BHP Billiton is the world’s largest diversified mining company, with its main focuses being on iron ore, copper, coal and petroleum. Together, these form the miner’s “four pillar” strategy while potash, a fertiliser ingredient, is likely to become a fifth pillar at a later date. It is this level of diversification that makes it so much more appealing than its rivals as it is less susceptible to a fall in price of any one commodity.
Companies like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Mount Gibson Iron Limited (ASX: MGX) all focus predominantly on iron ore production. While this is advantageous when the commodity’s price is high, they certainly feel the heat when prices drop, as they have done since the beginning of the year (although, admittedly, it has recovered somewhat in recent weeks). BHP’s higher level of diversification makes it a safer option for investors.
Focus on the future
The group’s focus on potash is another reason to get excited over BHP Billiton. While there is currently a large supply of the fertiliser ingredient, demand for the product is expected to boom over the coming decades with the global population set to soar. Rio Tinto is also exploring potash opportunities but BHP Billiton appears to be in the prime position with its Jansen mine, located in Canada.
Similarly, in spite of the pricing pressures on coal, the commodity will remain one of BHP’s pillars. The company’s CEO, Andrew Mackenzie, expects that coal will remain the most sought after source of affordable energy, particularly from nations such as China and India.
When Mackenzie took over the role as CEO early last year, he highlighted the importance of reducing costs and improving productivity to drive overall returns. Thus far, this has proven very successful.
In its first half-operations, the company announced that costs had been improved by US$4.9 billion while they are targeting US$5.5 billion by the end of financial year 2014. This result helped the company to exceed analysts’ profit forecasts by nearly US$1 billion.
It has recently been reported that the Big Australian is exploring the possibility of demerging its non-core assets, including aluminium, nickel and bauxite operations, into a separate entity which could be worth $20-$22 billion. Shareholders would likely receive shares in the new company.
Such a move would allow the management teams of both entities to focus more heavily on improving productivity and getting the most out of operations.
Based on the above reasons, BHP is the most attractive miner to invest in today. Shares are currently priced at $37.94 and offer a 3.1% fully franked dividend yield.