It was just about a month ago that my Foolish colleague Christopher Barker did his usual yeoman's job of delineating his thoughts about where commodity demand likely will be headed in the months ahead. As he noted, "We are right in the midst of one of those volatile pullbacks ... But Fools are reminded that the pendulum swings both ways."
His obvious feeling was that, despite the slide that commodities experienced during 2011, completely ignoring the sector would be folly. In building his case, he further disseminated information from within the industry that, while demand for some commodities appears to be softening somewhat, the markets for copper and coal remain especially bullish. I'd add crude oil to the list of commodities that are more than holding their own. That addition tends to recall my long-standing contention that few -- if any -- of the big commodities companies can deliver the broadly based resources package represented by Australia's giant minerals miner and energy producer BHP Billiton (NYSE: BHP).
China's shrinking bubble
It wasn't long ago that a mere mention of BHP almost automatically conjured up a similar reference to another large Anglo-Australian miner, Rio Tinto (NYSE: RIO), and to Brazil's big Vale (NYSE: VALE). But those were the days when the three companies were united by their combined dominance of the world's iron ore output, most of which found its way into serving China's seemingly endless appetite for steel. Now, however, while the country's demand for ferrous metals has hardly disappeared, shrinkage in China's own real estate bubble, along with economic uncertainty in other areas of the globe, has led to seers like those at Hong Kong's Nomura Group forecasting a decline in steel demand in China.
That change in itself will clearly result in a greater separation among the big three minerals producers. It's a gulf that actually became perceptible during the past year, as BHP shares handily outperformed those of the other two companies. The reasons? Unlike BHP and its ability to benefit from its expanding energy activities, Rio has remained immersed in the world of minerals.
|
Company |
Share Price Change Since 2010 |
Forward Annual Dividend Yield |
|---|---|---|
| BHP Billiton | (15.8%) | 2.90% |
| Freeport-McMoRan (NYSE: FCX) | (27.4%) | 2.50% |
| Rio Tinto | (22.2%) | 2.10% |
| Vale | (28.3%) | 0.20% |
Source: S&P Capital IQ.
At the same time, Vale has found it necessary to navigate its course in the face of a government that has become progressively more corrupt and financially demanding. There's even the possibility that the country's still relatively new president, Dilma Rousseff, may chance a major overhaul of the nation's cabinet during 2012.
BHP Billiton isn't all mine
Conversely, BHP -- despite being thwarted in several efforts to tread the major acquisition trail in recent years -- has been catapulted to a ranking as the world's seventh-largest independent upstream oil and natural gas producer. As a result, the company clearly enjoys an element of insulation from a slide in minerals prices.
BHP Billiton's primary global upstream energy focus is concentrated in the U.S. Gulf of Mexico, Australia, and Arkansas' Fayetteville shale, which it acquired early last year for $4.75 billion from the kingpin of unconventional U.S. plays, Chesapeake Energy (NYSE: CHK). At the same time, the Melbourne-based company holds nearly a one-quarter interest in the massive Mad Dog field in 4,500 feet of U.S. Gulf of Mexico water 100 miles from Louisiana. In September, an appraisal well drilled in the deposit led to a doubling of its estimated resources to an immense 4 billion barrels of oil equivalent.
Also included among its Gulf of Mexico assets is a 44% interest in the Atlantis field, which lies under depths reaching 7,100 feet approximately 130 miles from the Louisiana coast. In addition, it serves as operator of the Neptune field, of which it holds a 35% interest. Beyond the Fayetteville shale and the Gulf of Mexico, the company list of promising energy assets includes such locations as the South China Sea, Trinidad and Tobago, Algeria, Pakistan, and Malaysia.
The joy of being in the red
Beyond the company's expanding energy presence, and given the ongoing strength of copper that I mentioned above, let's take a quick look at the company's representation in the red metal. Based on 2010 production figures, BHP is the world's third-largest copper producer, behind Chile's state-owned Codelco, and Phoenix-based Freeport-McMoRan Copper and Gold, a company that, given its leverage to copper, deserves a position on all Fools' watchlists. Rio Tinto is the fifth-largest producer.
BHP Billiton's primary copper mines are the Antamina, in which it has a 33.75% stake and which is located in the Peruvian Andes, and Minera Escondida, in the Alcama Desert of northern Chile. Escondida, in which BHP holds a 57.5% share, is the world's most prolific producing copper mine.
You simply can't ignore this one
So there you have it. The world's leader in minerals mining (which also involves the production of aluminum, coal, manganese, and uranium) also includes a rapidly advancing presence in energy that none of its peers can match. It's an entity upon which management intends to spend $20 billion on expansion projects this year alone.
In the past, I've included BHP among the 10 core stocks that belong in all Foolish portfolios. It's a position about which I feel more strongly with each passing day. If you're looking for more ideas, The Motley Fool has created a new special report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. Get instant access to the names of the three oil stocks.
