BHP Billiton Ltd Is an Efficiency Machine

Since 2012, most investors should have known there was "trouble in the mines." Global growth was slowing, and was doing so on a secular scale. Leading the way was a marked deceleration of growth in China. The result was declining prices in all sorts of minerals and metals needed for increased economic activity: Iron ore, copper, manganese, aluminum, and metallurgical coal.

Each of these is levered to global growth. In other words, just a deceleration in global growth can cause demand for these minerals and metals to decline absolutely. Subsequently, this led to declining profits for miners in 2012 and 2013. 

For big mining names, this was business as usual. In fact, big miners are used to this cycle and understand that in times of robust growth, demand for the aforementioned minerals and metals is seemingly insatiable and on the flip side, when those good times are over, demand drops sharply. 

Unfortunately in 2012, many miners had huge expansion projects in the works and faced some tough choices. Australian-Dutch mining giant BHP Billiton (NYSE: BHP  ) , perhaps the largest of mining names, reacted to this new reality in a sober, open-handed way.

Instead of getting caught "swimming naked" like the company's two peers Rio Tinto  (NYSE: RIO  ) and Vale  (NYSE: VALE  ) , BHP began preparations early on. Readily acknowledging that in leaner times miners do well only by reducing costs (both fixed and variable) and by getting the same output from less capital employed, BHP Billiton made it a priority to execute those plans. Over the past couple of years, BHP has set itself apart from its competitors.

Source: BHP Billiton Investor Relations

This chart shows BHP's results in reducing operating costs, increasing productivity, and increasing selectivity in development and exploration in a newer, leaner business climate. As you can see, BHP has saved almost $5 billion since fiscal 2012. The company has done so without decreasing volumes.

Source: BHP Billiton investor relations

Here is another good "big picture" view of things. Notice the $1 billion in savings from controllable cash costs and another $500 million in productivity-based volume increases. 

Source: BHP Billiton Investor Relations

In the first half of fiscal 2014, BHP extended its lead in return on capital. Rio Tinto's last reported return on invested capital was a mediocre 7.9%. Vale recently reported a negative return on invested capital. BHP's return on invested capital over its most recent period was a solid 10.41%. The chart above excludes the effect of existing projects in the works, but it also shows the effect of increased efficiency from productivity gains.

BHP's sober analysis and willingness to accept a few "home truths" has allowed the company to transition into a tougher reality, while the company's competition has floundered.

Bottoming out

Source: BHP Billiton Investor Relations

Since the latter part of 2013, it looks like margins in most minerals have bottomed out and stabilized. In fact, a few are even recovering. As a company that reduced capex, managed costs, and stayed profitable in tough times, BHP will be first to the punch when the situation turns around. Right now, the overall metals picture doesn't look so bad. 

Closing thoughts
If you want exposure to mining, BHP is easily the best-managed, most shareholder-friendly company of the group. That's not to say the company is issue-free: I believe BHP paid way too much for its dry gas assets in the U.S. I also believe the gung-ho start-up of Olympic Dam (at the tail end of the last global boom) was overambitious -- the project has since been put on hold.

Finally, the company's potash exploits in Canada have not gone well thus far. However, BHP is easily the most profitable of all miners, and it should reward shareholders with solid dividends and buybacks in the years to come.

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