I sold my stake in BHP Billiton (LSE: BLT) (NYSE: BBL.US) some time ago, so I no longer have a direct interest in the stock. But I have been watching its subsequent progress with interest.
Today, it trades at the same price it did two years ago. Over five years, it has returned just 25%, trailing the 40% return on the FTSE 100 over the same period. No, I don’t regret selling.
Chinese Whispers
I sold BHP Billiton because I thought the mining sector was vulnerable to a potential Chinese hard landing. The crash hasn’t happened yet, Chinese GDP is still on course to grow around 7.5% this year, while the credit and property bubble stubbornly refuses to burst.
Commodity prices have come under pressure from falling demand and growing supply, but have recovered lately. Glencore chief executive Ivan Glasenberg is feeling bullish enough to claim that the “commodity supercycle ain’t over, China is still buying, demand for commodities hasn’t tapered off, it’s even higher than it’s ever been”.
Yet BHP Billiton has fallen out of favour, and is down almost 4% following publication of its half-year results.
Dash To Potash
If I owned BHP Billiton today, I would definitely sell. That’s because it’s in the process of undermining what for me was its greatest selling point compared to rival mining giant Rio Tinto (LSE: RIO) (NYSE: RIO.US).
I liked BHP Billiton because of its massive diversification, which meant the stock wasn’t exposed to any single commodity or currency. That marked it out from Rio Tinto, which generates 90% of its earnings from selling iron ore, of which around half goes to China.
Last November, BHP’s management said it was introducing potash as its “fifth core pillar”, to stand alongside iron ore, petroleum, copper and coal. That’s quite a roster of commodities.
Sorry Spin-Off
Which is why I was disappointed by its demerger plans, which will see BHP Billiton spinning off a new global metals and mining company, based around its aluminium, coal, manganese, nickel and silver assets.
I liked the fact that BHP Billiton gave me access to all these different commodities, and spread my exposure to metals and minerals so widely.
Sydney Is Far From Me
Like many, I would have expected management to have rewarded investors, possibly by taking the opportunity to launch a share buyback. A mooted capital return of $5 billion didn’t materialise, however, despite a 23% rise in BHP Billiton’s net profit to $13.8bn.
As a UK investor, I would rather the new company was listed on the London stock exchange, rather than Sydney.
This will also diminish the new company’s attraction to UK-based fund managers, Citibank analysts have pointed out, because many have investment mandates that prevent them from owning overseas stocks. That could drag on its share price.
But mostly, I wanted that diversification. Now that has been diluted.
Walsh Wins
Not that Rio Tinto’s exposure to iron ore has harmed its recent performance. It is up a steady 15% over the last two years, against BHP Billiton’s no-show.
Rio was helped by its 21% increase in first-half underlying earnings to $5.1bn, which chief executive Sam Walsh hailed as “outstanding”, justifying his strategy of cutting costs, divesting assets, boosting productivity and generating stronger cash flows.
China remains the great unknown hanging over both companies. But signs of a pick-up in US construction, now growing at its fastest rate in eight months, could offer some ballast.
Today, I would sell BHP Billiton. But I might be tempted to buy Rio Tinto.
