As every Fool knows, business is made up of revenue and costs. Keep the former high and the latter low and your shareholders will have big smiles on their faces.
Of course, when you have control over only the costs of your business and absolutely no say whatsoever in how much you can charge, it makes life a little more unpredictable.
Indeed, companies whose goods are identical to those sold by their rivals have practically no say in what they receive for their goods. They simply must accept whatever the going rate is and, should that be lower than the cost to produce the good, they have little choice but to accept a loss, reduce costs and move on.
This leads me neatly onto mining companies. They have no control over the market price of the metals they mine and, as such, investors in mining companies must accept that profitability is very closely linked to the interaction between supply and demand for the metal in question.
So, I was very encouraged to read recently that one of the key indicators of the strength of the Chinese copper market has risen to its highest level on record. Chinese copper premiums (the cost of physical copper over and above the benchmark futures prices) have increased threefold in 2013 to reach a high of over $200 per tonne.
This is significant because not only does it mean that demand appears to be robust in China, it bodes well for companies such as BHP Billiton (LSE: BLT) (NYSE: BBL.US) because China accounts for around 40% of world copper demand. As such, an improvement in China’s appetite for copper means substantially higher demand for BHP Billiton’s third biggest division by revenue (base metals).
Of course, Chinese copper imports remain below the highs of 2011 but the news is nevertheless encouraging. In my view, it provides yet further evidence that the Chinese growth story remains on-track, which in itself is great news for BHP Billiton.
In addition, shares in BHP Billiton currently trade on a price-to-earnings (P/E) ratio of 13.4, which compares favourably to the FTSE 100’s P/E of 15. Furthermore, earnings per share are forecast to grow at an annualised rate of around 16% over the next two years.
This, combined with a current yield of 3.9%, means shares look great value at current price levels.
Of course, you may be looking outside of the mining sector for an addition to your portfolio. If you are, The Motley Fool has come up with a shortlist of its best ideas called 5 Shares You Can Retire On.
It’s completely free to take a look at the shortlist and I’d recommend you do so. Click here to view those 5 shares.
> Peter owns shares in BHP Billiton.
