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Goldman Sachs adds BHP Billiton shares to its conviction buy list

All eyes will be on the BHP Billiton Limited (ASX: BHP) share price this morning after the mining giant was the subject of a broker note out of Goldman Sachs.

According to the note, the broker has added BHP to its ANZ conviction buy list with a price target of $37.00. This price target implies potential upside of around 17% for its shares over the next 12 months, excluding dividends.

Why is Goldman Sachs bullish on BHP?

Goldman believes that BHP is only halfway through a multi-year re-rating and it expects returns to improve significantly due to the mining giant’s strategy of focusing on maximising cash flow through high-returning growth.

It notes that BHP is generating US$11 billion to US$12 billion of free cash flow per annum and expects the majority of this to be returned to shareholders.

In addition to this, it likes BHP due to its favourable commodity mix, superior margins, non-core divestment potential, and oil exploration upside.

Another positive for the broker is its current valuation. It has pointed out that its shares are trading at 0.9x net present value of $35.40 per share and just 5.6x EV/NTM EBITDA. This compares to its 20-year average of 7x.

In addition to BHP, Goldman also likes rival Rio Tinto Limited (ASX: RIO) for similar reasons. It has a buy rating and $88.00 price target on Rio Tinto’s shares.

Finally, it also placed a buy rating and $2.70 price target on Alumina Limited (ASX: AWC) due to its strong free cash flow and returns profile and being positive on the alumina market.

Should you invest?

If you’re looking for exposure to the resources sector then I think BHP and Rio Tinto would be great options.

But if I had to choose just one, I would choose BHP because of its diversified operations.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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