Why I’m Buying this Global Mining Giant
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just the other day I wrote, “Europe is on the verge of economic collapse, China is in the midst of slowing down, yet I’m buying a company that makes its money navigating the stormy seas of global trade.” Today I am doing something very similar as I continue to build out a portfolio of exceptional dividend paying stocks. I call this the “No Drip, No Mess” Portfolio and today’s recommendation takes advantage of the current economic concerns to potentially add a global mining powerhouse at a fantastic price.
Diversified Australian resources company BHP Billiton (NYSE: BHP) has its hands in nearly every commodity that can be pulled out of the ground. They have an impressive list of physical mining assets as they have positions in aluminum, energy and metallurgical coal, iron ore, copper, manganese, uranium, silver, titanium and diamonds as well as operations drilling for liquid assets such as oil and liquefied natural gas. It’s their exposure to oil and gas that sets them apart from their fellow Australian miner Rio Tinto (NYSE: RIO) and one of the key factors in my decision to go with BHP.
The other key factor that differentiates BHP from their mining rivals is found in their strategy to “own and operate large, long-life, low-cost, expandable, upstream assets diversified by commodity, geography and market.” Therein lies their competitive advantage over their peers, and if you ever listen to their CEO Marius Kloppers and his team you’ll hear that strategy of long-life, low-cost multiple times in every investor call.
The other phrase you’ll hear a lot from their management team is world class. That phrase describes their assets better than any other because these massive, long-life and low-cost assets are in key geographic locations. Are you looking to profit from the growth of China? BHP has one of the best iron ore positions in Western Australia and their Olympic Dam copper and uranium assets also in Australia is another top quality asset. Want to invest in helping to feed America’s nearly insatiable demand for energy? Then their liquids position in the Eagle Ford Shale and acreage in the Gulf of Mexico have you covered. As you keep going down their asset list you will continue to find them positioned in the best resource basins across the globe.
Because of their vast diversification you take away some of the extreme commodity price volatility that’s found when investing in a pure play. It is not that there are not opportunities out there but you have to be right on the commodity and the company, because the operational risk can be more devastating to an investment than the commodity price risk. To build a portfolio that rivals BHP you’d need to look at iron ore and possibly an investment in Rio Tinto or Vale (NYSE: VALE) while in uranium your best bet would be going with Cameco (NYSE: CCJ) and if you wanted a liquids play in the Eagle Ford you could have invested in Chesapeake (NYSE: CHK). Yet, you can get all that and more with BHP. So unless you have a specific bullish reason to be investing in a pure play and have the foresight to buy the correct operator it just makes more sense to invest long term in BHP. Look no further than Chesapeake to see how operational risk can affect an investment.
An investment in BHP is an investment in the long-term demand for commodity products. While China’s slowing they are still growing. And while the world might also be slowing, someday they will need iron, oil and everything else in between. The key though for BHP is that they own low-cost assets so even as China and the world around it slow and commodity prices dip, BHP still stands to profit. Last year they had $12.3 billion in cash flow and were able to spent $9.6 billion in capital and exploration costs while maintaining a 25% leverage ratio. Over the past decade they’ve not only invested billions in projects that they are just starting to see returns from, they also returned over $50 billion to shareholders in the form of dividends and share buybacks. Given their low leverage and terrific cash generation investors will continue to see cash flowing back their way even if the world economy continues to slow.
In an effort to be over the top conservative given the concerns over a slowdown in China, I am recommending writing one November $50 put for a 5% allocation in the “No Drip, No Mess” Portfolio. The pricing is just too good to pass up as those puts are yielding a healthy 3.5% as of this writing. These puts are more than 20% lower than the current strike price and if assigned we’d be picking up shares at a price not seen since the depths of the credit crisis. We’d also be locking in a dividend yield of nearly 4.5% to provide ample income for future reinvestment. If we are not assigned shares we’d look to either write new puts or simply buy a 5% allocation outright and frankly that is the likely scenario as this is a bit of an opportunistic trade given implied volatility thanks to the worries in China.
latimerburned owns shares of BHP Billiton. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.