One of BHP Billiton Limited (ADR) (NYSE:BHP)’s key strengths — particularly in comparison to Vale SA (ADR) (NYSE:VALE), the world’s second-largest mining company — is its diversified operations. These see BHP Billiton Limited (ADR) (NYSE:BHP) mining and selling a range of commodities, including petroleum, aluminum, base metals, and iron ore, as the chart below illustrates.
| Product | BHP Percentage of Revenue | Rio Percentage of Revenue | Vale Percentage of Revenue |
|---|---|---|---|
| Petroleum | 21% | 0% | 0% |
| Aluminum | 11% | 20% | 0% |
| Base Metals | 19% | 13% | 16% |
| Diamonds | 1% | 8% | 0% |
| Iron Ore | 28% | 48% | 69% |
| Manganese | 3% | 0% | 0% |
| Metallurgical Coal | 9% | 0% | 2% |
| Energy Coal | 8% | 11% | 0% |
| Fertilizers | 0% | 0% | 7% |
| Logistics Services | 0% | 0% | 4% |
Source data: BHP Report for the half-year ended Dec. 31, 2012; Rio 2012 Annual Report; Vale Q1 2013 Financial Report.
Of the big three miners, BHP Billiton Limited (ADR) (NYSE:BHP) has the most diversified production, making it the least reliant on any one particular commodity such as iron ore to drive sales and profitability. As a result, BHP generates less than a third of its revenue from one of the hardest-hit commodities to date: iron ore. In contrast, Rio Tinto plc (ADR) (NYSE:RIO) relies on iron ore to generate almost half its revenue, and Vale SA (ADR) (NYSE:VALE) over two-thirds. The value of this diversified production base becomes even clearer when you consider that BHP Billiton Limited (ADR) (NYSE:BHP) generates a fifth of its revenue from petroleum, and another fifth from base metals, including gold and silver.
This allows BHP, unlike Vale SA (ADR) (NYSE:VALE) or — to a lesser extent — Rio Tinto plc (ADR) (NYSE:RIO), to mitigate the risks that a declining iron ore price poses for its sales and profitability. This is an important point, because for the year to date, iron ore has already fallen by 28% to $114 per metric ton, and it is expected to fall farther. Furthermore, BHP Billiton Limited (ADR) (NYSE:BHP) is able to defray much of the political and economic risk associated with the mining industry, because the majority of its revenue is generated in the politically stable countries of Australia and the U.S.
Vale SA (ADR) (NYSE:VALE) obtains the majority of its revenue from Brazil, where the government has shown a disturbing predilection to intervene in the economy, implement protectionist measures, and interfere in the business sector. In addition, Rio Tinto plc (ADR) (NYSE:RIO) derives a considerable minority portion of its revenue from unstable frontier markets such as Mongolia and Mozambique.
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.
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