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Why BHP Billiton Limited is your best mining bet

For investors wanting exposure to the resources industry, BHP Billiton Limited (ASX: BHP) is your best option. In addition to offering a 3.1% fully franked dividend, it also boasts a far superior level of diversification to that of its rivals and is expected to announce an annual profit just short of the record US$15.4 billion it set in 2008 when it reports in August.

Firstly, the company’s strong production should be noted. It recently released its third quarter operational results which revealed a 10% increase in production, driven by improvements in productivity including record production across four commodities and an upgraded full-year guidance for both iron ore and metallurgical coal (both are used in steelmaking). Improving productivity levels have been a core focus of the group since Andrew Mackenzie’s induction as CEO early last year which is helping to drive up earnings.

Another of the company’s focuses is on reducing costs. Throughout the mining boom, the miners threw money around like it was going out of fashion – making unnecessary acquisitions and granting generous capital expenditure on less-profitable operations. With strong headwinds now facing the sector, this has been targeted as a key way to boost profits. In fact, the company is aiming to reduce costs by up to US$5.5 billion by the end of this year!

However, one of the factors that make BHP Billiton a better (and safer) investment than its rivals is its high level of diversification. Commodity prices are unstable (think back to iron ore’s 10% plunge over the space of two days in March) and there is a high level of uncertainty regarding future demand of other key commodities. While companies like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Mount Gibson Iron Limited (ASX: MGX) are all highly susceptible to movements in the price of iron ore, BHP also derives large portions of its revenue from copper, coal and petroleum. Thus, it is less vulnerable to movements in any one commodity’s price.

Furthermore, there is also talk of greater shareholder returns later in the year. While a share buyback program has been highly anticipated (which would theoretically drive shares up gradually), it has also been reported that the miner could be exploring the possibility of a demerger of its non-core assets. This would also be very good for shareholders in that it would allow management to focus on improving its main operations.

Foolish takeaway

Although BHP remains your best bet for exposure to the sector, the company’s shares could well fall below their current level. If you’re considering buying, it might be wise to buy in portions (that is, buy some now and then wait a week or two in case the shares drop before buying any more). Shares are currently trading for $38.10, which is just 0.3% above its share price at the beginning of 2014.

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

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