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Do you know how much money BHP Billiton (NYSE: BHP ) made in the first half of its fiscal year? If you woke up in Australia this week, you probably do. That's because the business press here can't stop repeating that the company made a record $10.5 billion, putting the mining giant on track to make more than $23 billion during 2011.
That's newsworthy not only because it's a lot of money but also because it comes on the heels of BHP's successful effort to defeat a proposed windfall-profits tax on miners. As you can imagine, some Australians are now calling on their government to revisit that plan.
The mining industry here is a strong lobby, so the government will surely have a fight on its hands if it tries to revisit the compromise it reached with the miners. Yet the politics surrounding BHP's earnings are not as interesting to me as the opportunities BHP stands ready to create in Australia. That's because BHP is forecasting rising global demand for commodities and plans to invest $80 billion over the next five years to boost production. That's a big number any way you slice it, but it's particularly impressive given that BHP spent just $24 billion on expansion over the past decade. Companies that build equipment for BHP, test its samples, ship its products to port, help it explore for reserves, or participate anywhere else along the mining value chain must be positively giddy today and thinking about what they need to do to increase their own capacity.
That makes for a pleasant morning
For that reason, we weren't surprised to find Campbell Brothers CEO Greg Kilmister in a very good mood when we met with him this week in Brisbane. Campbell Brothers is one of the world's top providers of laboratory services to mining companies such as BHP, and growth at BHP means Kilmister and crew will have many more samples to analyze -- at a better than 20% profit margin. What's more, the company looks pretty smart today for having invested aggressively in capacity over the past few years. Unlike many of its competitors, Campbell Brothers won't need to rush to meet rising demand for its services.
Yet Kilmister isn't an unabashed bull when it comes to commodities. He's loyal to his belief -- one that we at Motley Fool Global Gains share -- that mining is a cyclical industry, and even though this cycle may last a little longer than the last one, he's adamant that a downturn is coming.
That perspective shouldn't scare you, but it should influence how you think about investing in this sector. If you agree that mining will always be cyclical, then what separates a good company from a bad one is the ability to cut costs during a downturn without sacrificing the ability to quickly scale back up when things look better. Campbell Brothers has come up with an innovative hub-and-spoke model to achieve this kind of efficient operation, and because of it, the company posted one of the best years in its 100-plus-year history during the global financial crisis (or "the GFC," as everybody says down here).
Can it repeat that success?
Of course, that experience has made investors willing to pay dearly for Campbell Brothers, with the stock trading for more than 15 times cyclically high operating earnings in Australia today. That's a lot for a cyclical business, even if it is a superior company.
But our meeting with Campbell Brothers was by no means a waste of time. Sitting down with Kilmister helped us realize exactly what type of company we want to invest in during the multidecade commodities boom: a high-margin services business with a disciplined operating track record and the ability to roll with volatility in commodity prices -- and we also want it cheap.
I don't think that's too much to ask for, and our remaining company visits in Brisbane and Sydney include a number of promising candidates. If we find what we're looking for, you'll be the first to find out. Stay tuned by signing up for our dispatches using the box below.