Right now, the news headlines for mining are mostly about business slowdowns, cost cutting, job losses and weakening commodities prices. Not the cheeriest place to be in the market.
Fortunately, Foolish investors operate on a longer time frame and use sour news developments to their advantage. The tough business environment reveals the strongest, most capable companies that can still perform well on tighter margins.
BHP Billiton Limited (ASX: BHP) is one of them. The diversified miner and energy producer has been recently hit like other iron ore miners such as Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). In the past three months, the stock has gained only 0.7% versus the 1.7% increase of the S&P ASX 200 Index (ASX: ^AXJO). However, changes taking place now are improving the big miner's prospects, leading me to think that things are not as dire as the market imagines it is.
— Market discounting baked into price
Job cuts at BHP's iron ore operations in WA are just the latest movements of the company's restructuring. With expected job cuts possibly numbering in the thousands, the stock isn't making new lows. Since hitting lows a little under $32 about a year ago, the share price has stayed up around $36.
The market is taking a "wait and see" attitude, but isn't overly spooked. Over time, the cost savings from the restructuring will improve earnings margins.
— Growth in US oil and gas operations
One of the four pillars BHP is basing its long-term growth on is petroleum. It has operations and about 58,000 acres in the resource rich Eagle Ford shale oil region in the US.
A dramatic development in US restrictions on oil exports may open the market there for LNG and gas producers. A forty-year-old ban, left over the from 1970s oil shocks, may be relaxed to allow some types of oil to be exported. BHP is talking with US regulators to open access for its products onto the foreign markets where higher sales prices can be achieved. This will help underpin the company's earnings growth as iron ore and coal prices remain at lower levels.
— Low cost producer
BHP is one of the lowest cost producers in iron ore and coal, so although profits can get squeezed, its margins are much better than smaller competitors. This is a classic sign of a company with a competitive advantage. It can ride out the tough times and later on when the commodities markets recover, it will be one of the first to rebound in earnings and share price.
Investors can add to their BHP positions with confidence that a more streamlined business with lower costs and oil diversification will work toward improving earnings over the long run.
