BHP Billiton Limited (ADR) (BHP), Vale SA (ADR) (VALE): This Diversified Global Miner’s Too Cheap to Ignore

BHP, like Rio Tinto plc (ADR) (NYSE:RIO), is also focusing on expanding its Australian operations allowing it to access greater economies of scale and reduce production costs per unit. Both it and Rio are also substantially closer to the primary market for commodities — China — when compared to Vale SA (ADR) (NYSE:VALE), thus reducing their shipping costs and times. As a result, BHP and Rio Tinto plc (ADR) (NYSE:RIO) are far more competitive than Vale, and better equipped to cope with a prolonged downturn in iron ore prices.

BHP delivered some disappointing financial results for the first half of 2013, with net income down by 23% to $4 billion. But the company has significantly increased production in the second half of 2013, as a means of creating further economies of scale to drive down production costs per unit. For the year ending June 30, 2013, BHP reported that iron ore production increased by 7% year over year, while petroleum production was up 6% in the same period. Copper and metallurgical coal production also significantly increased during this period, up by 10% and 13% respectively.

Foolish Bottom Line

Despite softening demand for commodities, and China’s economy waning, BHP is increasing production as a means of driving greater economies of scale. These will allow BHP to take further advantage of its diversified miniing operations and their close proximity to China as a means of cutting production costs and increasing sales, allowing the company to maintain its profitability.

This indicates that while softer commodity prices will continue to affect profitability, BHP is in a superior position to either Rio, or more specifically Vale, by virtue of its diversified and growing production. This also leaves the company better-positioned than either Rio or Vale to weather a prolonged downturn in commodity prices.

The article This Diversified Global Miner’s Too Cheap to Ignore originally appeared on Fool.com and is written by Matt Smith.

Matt Smith has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Matt is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.