4 big reasons to bank on BHP Billiton Limited

The news of Glencore Plc (LON: GLEN) talking with Rio Tinto Limited (ASX: RIO) about a possible takeover got me thinking about BHP Billiton Limited (ASX: BHP).

Personally I think BHP is still a better choice for investors over Rio Tinto. Here’s why.

The reason why Glencore thinks Rio is cheap

Why did Glencore wait until now? Most likely it is to take advantage of so many commodities like iron ore, coal and copper being at low prices. Equally, the market gloom has share prices flagging as well. Both make Rio’s shares cheaper and a potential takeover less expensive.

Glencore has to plan long term, so investors should as well. BHP’s shares are back below $34. One of the best times to buy mining companies is at the bottom of commodity cycles. Although iron ore could sink further, BHP can survive at its low production costs – the second lowest after Rio Tinto. Getting BHP shares cheap now will increase your returns years from now.

Cash costs could go lower

BHP recently stated it can squeeze more efficiencies and costs out of its business to lower its iron ore cash cost – to even lower than Rio Tinto’s roughly $20/ tonne. That could open more of a buffer for margins and widen earnings as BHP increases production from 225 million tonnes per year to 290 million tonnes in less than three years.

US shale and Mexican crude

Aside from iron ore, BHP’s trump card is its oil and gas business. Currently, it is producing shale oil in the US and is one of the largest producers in the resource rich Eagle Ford region of Texas. It is planning to double its production by 2017 to about 200,000 barrels of oil equivalent.

Also, it is applying for permits to export the product to take advantage of higher overseas energy market prices in Asia. This would further bolster any continuing iron ore weakness. The big miner is also in talks with the Mexican government about drilling the Gulf of Mexico in Mexico’s waters in the near future. That could supply even more oil and profits.

Spinning off non-core assets

Lastly, BHP’s plan to separate its lower margin commodities businesses like nickel and aluminium from its higher margin businesses makes the company more attractive to investors as well.

That’s why being such a diversified mining company that even does oil and gas gives BHP the opportunities to work around the regular commodity cycles which can’t be avoided. Those holding BHP will appreciate that the most as they can sleep better about their future returns.

The commodity markets won’t turn around quickly. This is more of a mid-to-long-term suggestion. BHP will be paying a dividend along the way as you wait for the share price to grow. If something more short term might be better for you, there is another company that offers a value price tag, growth and big dividends.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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