Why BHP Billiton Limited is the safest mining bet

Is it a reasonable buy today?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Although there are strong headwinds facing BHP Billiton Limited (ASX: BHP), the mining heavyweight is still a better investment prospect than others in the resources sector.

There’s no denying the problems facing the industry. To begin with, demand growth from emerging economies such as China for key commodities is diminishing while, at the same time,  production levels from the world’s largest producers are being heavily ramped up, applying a downwards pressure on the prices of the commodities. The strengthening Australian dollar is another problem facing the miners which generate their revenue from exporting products overseas.

While BHP Billiton will certainly be affected by the factors mentioned above, its higher level of diversification makes it a much safer bet than its major competitors.

Companies like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Mount Gibson Iron Limited (ASX: MGX) focus heavily on iron ore production. While this is incredibly advantageous when the commodity is soaring, their weaknesses are certainly exposed when it drops in value. For instance, Fortescue’s shares collapsed in early March when iron ore plunged by 10% over the space of just two days. The company ended up dropping 9.4% in a single day of trading while Rio Tinto and other pure iron ore players also felt the pain. BHP fell, but nowhere near as heavily.

Although iron ore is also BHP’s major generator of revenue, the company’s risk is better spread given that it is also heavily focused on copper, coal and petroleum under its “four pillar” strategy (while potash is shaping up to become its fifth pillar). Its diversification makes the company far less susceptible to weakness in any one of these divisions, making it a much safer bet.

The miner will release its operational review for the March quarter tomorrow which will give us a better indication of how the company is travelling.

Foolish takeaway

Given the high level of volatility currently blanketing the sector, an investment in any of the miners would be considered risky. However, if you believe you absolutely must have exposure to the sector, BHP is the safest option.

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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »