BHP Billiton might be interesting core holding

8 Feb 2012 by Jim Fickett.

Today the Financial Times had a positive comment on BHP Billiton, the world's largest mining conglomerate.

BHP’s 5.5 per cent slide in net profit to $9.9bn in the half-year to December is its first profit decline since 2009. But its investment case remains intact.

For background, here is a standard blurb on the company:

BHP Billiton plc is a diversified natural resources company. The Company operates nine customer sector groups (CSGs): petroleum, aluminium, base metals (including uranium), diamonds and specialty products, stainless steel materials, iron ore, manganese, metallurgical coal and energy coal. During the fiscal year ended June 30, 2010 (fiscal 2010), the Company realized an annual production volume of 158.56 million barrels of oil equivalent. During fiscal 2010, the company produced 1.2 million tonnes of aluminium. It also produced 13.9 million tonnes of bauxite and 3.8 million tonnes of alumina. On March 23, 2010, the Company completed the acquisition of all the issued and outstanding common shares of Athabasca Potash Inc (API). In August 2011, the Company acquired Petrohawk Energy Corporation.

If you believe, as I do, that resource investments will have the wind at their back for the next few decades, BHP might be a good way to bet on the trend, without having to get into constant analysis of individual commodities. Also, for some individual commodities, like potash, the investment case is strong but it is difficult to find a good company specializing there; a conglomerate like BHP might be your only choice. (For an overview of the case for potash see Jeremy Grantham's second quarter letter last year.)

Valuation seems, at least at first glance, quite reasonable. Currently the company's price is below its long-term upward trend line. The 12-month trailing price/earnings ratio is 9.5. The free cash flow yield is 4.7% (ratio of average free cash flow over the past 5 years to current market capitalization). The dividend yield is 2.7%.

This is by no means a full analysis and, at this point, I have no opinion on whether BHP is a good investment. But the case looks interesting.