It’s been a great summer for investors in BHP Billiton (LSE: BLT) (NYSE: BBL.US), with the Australian-focused mining company making gains of 4.5% during the last three months while the FTSE 100 (FTSE: ^FTSE) is down 2% over the same time period. However, looking a little further back, BHP Billiton has disappointed. For example, over the last five years it is up 29%, which doesn’t compare favourably to the FTSE 100’s gains of 45% over the same time period. Looking ahead, though, could BHP Billiton be a great investment and, more importantly, is it the best mining stock in the FTSE 100?
Diversification
A key consideration for investors when it comes to mining stocks is diversification. There are two main parts to this: geographical and commodity diversification. The first, geographical, is important because many of the world’s largest metal and other commodity deposits are located in countries that have a history of political instability. Furthermore, changes in governments and the introduction of new taxes can, for example, reduce the profitability of mining companies in one part of the world. Therefore, it is desirable to operate in a mixture of locations.
The second part of diversification concerns the commodities mined by a company. If a company mines only one metal and its price doubles, that’s great news. However, if its price halves then the company may struggle to stay in business. Therefore, producing a range of commodities helps to spread the risk, although it also means that the reward may not be so great during the boom years.
On both fronts, BHP Billiton is extremely well diversified. It mines a range of metals, from aluminium to coal and from copper to nickel, and although its operations are centred in Australia, it has projects and prospects across the globe. This should help BHP Billiton to remain relatively stable in future years and means that its earnings visibility should be among the most attractive in the mining sector.
Looking Ahead
Clearly, BHP Billiton has suffered in recent years as demand for a range of commodities has stalled. However, with its share price disappointing and demand for metals starting to pick up, it appears as though it now trades at a relatively attractive valuation. For example, its P/E is currently 12.8, which is well below the FTSE 100 P/E of 13.5. Indeed, with BHP offering unrivalled diversification and a reasonable price, it remains the obvious choice for investors who want to gain an exposure to the commodity sector. As such, it continues to rank at #1.
