I've been looking for an opportunity to add to my BHP Billiton (BHP +2.82%) position since I first started to build it as we came out of the financial crisis. With shares down more than 22% this year, and 40% less than its all-time high set just over two years ago, I now have my long-awaited opportunity. I'm going to take advantage of it and add to this core holding of my portfolio.
I originally bought BHP because I wanted to have a mining company in my portfolio. Miners provide the world's economy with the basic building blocks required to grow. Also, most mining stocks pay a solid dividend that's wanted in a core holding. I settled on BHP because it has assets strategically located close to the fastest growing Asian markets, and it's the most-diversified global resources company on the planet, which helps to mitigate some of the major risks investors face when investing in a miner.
While many investors choose to invest in a specific metal such as gold or coal, I like diversity when it comes to my base metals. Investors in a pure play iron ore miner like Cliffs Natural Resources (CLF +1.85%) have seen the pain firsthand of what it's like to be in the wrong metal. Likewise, investors in gold mining stocks such as Goldcorp have endured a lot of pain as the price of gold plunged.
Following the yellow brick road has lead investors to nothing but losses. Photo Credit: Gold Footpath by George Hodan.
Cliff's stock was just crushed when it reported first-quarter earnings this year. It was hit by lower commodity prices and higher costs, which forced the company to slash its dividend and raise capital to bolster its balance sheet. Meanwhile, Goldcorp investors had to endure last quarter's record 23% plunge in gold prices. BHP, on the other had, has had the diversity that has helped the company's stock to remain relatively flat over the past year while those two stocks cratered.
The other piece of BHP's business model that I really appreciate is that its business is more diverse than just metals. The company has a growing oil and gas business, as well as a developing position in potash. Those two assets, in my opinion, set its business apart.
Oil and gas is a great business for BHP Billiton. It has developed a significant position in the Gulf of Mexico, onshore U.S., and Australia, as well as emerging positions elsewhere. The company delivered record oil and gas volumes last year and was solidly profitable. The future looks very good, as it has a tremendous reserve base and among the lowest operating costs in the industry.
An interesting side note that I will point out is that one of its mining rivals, Freeport McMoRanhas recently decided to join BHP in the oil and gas space as it closed two major acquisitions earlier this year. Those deals really help to stabilize the copper giant's earnings stream as it shifted earnings from 100% mining related to one that is 25% oil and gas. However, Freeport still is nowhere near as diversified as BHP, and doesn't have the same Asian growth potential. That's why I'm choosing to add to my BHP position rather than swap out my position for a company like Freeport.
Finally, I'm a big fan of BHP's move into potash. It has been a long road for the company to get there, as it included an unsuccessful bid for Canada's PotashCorp. Because the deal was squashed by the Canadian government, BHP has decided that if you can't make them join you, then you can beat them at their own game, which is why it has undergone a major project called the Jansen Project in order to add this important fertilizer to its portfolio mix. Adding PotashCorp, which controls 20% of global potash capacity, would have really helped move BHP to the top of the food chain. However, the company can still be a big player, but it will just take a lot more time to get there. It is growth assets like potash, which is a play on the world's growing population base and middle class, that really give the company an open-ended future.
I look at BHP Billiton as a core holding. The company will benefit from supplying the global economy with the basic materials it needs to grow. Further, it's strategically positioned to benefit from growth in China and India, while offering upside from both oil and gas as well as potash. That makes the company the most complete global resource player, which is why I want to put some of my excess cash to work, and add to my position in its stock while it's still on sale.
