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As tea leaves go, those presented to investors in BHP Billiton’s (BHP) February 16 post-earnings-report conference call could have been a bit clearer. I think the way to decide buy/sell/hold on BHP and on the mining sector as a whole is to look past the very confusing top down strategic message to the nitty gritty of the key commodities of iron ore and copper. (BHP Billiton is a member of my long-term Jubak Picks 50 portfolio )

Let’s start with the murky top-down stuff first, okay?

CEO Marius Kloppers said the company would increase its dividend for the first half of 2011 to 46 cents (U.S.) from 42 cents. I’m not clear what that is a sign of since the increase barely keeps pace with appreciation in the Australian dollar—for Australian shareholders, in other words, the increase is no increase at all.

Kloppers also announced an expansion of the company’s current $4.2 billion share buy-back to $10 billion. That amounts to about 4% of the company’s outstanding shares.

And he said that the company wasn’t actively looking at any acquisitions right now although the company has plenty of cash and cash flow: BHP Billiton reported six month profits of $10.7 billion on February 16.

So was BHP Billiton saying that it thinks mining stocks are expensive now, so no acquisitions? Hard to tell because Kloppers may be feeling a bit burned on the acquisition front after a failed bid for Potash of Saskatchewan (POT) in 2010.

And are the increases in the dividend and in the share buy-back plan a signal that the company thinks the commodities boom is getting near an end and it’s time to pull back on investments in its business?


Kloppers also announced that BHP Billiton will spend $15 billion in 2011 to grow production. The capital budget for the next four and a half years comes to a staggering $80 billion. BHP Billiton certainly seems to be saying that it thinks the commodities boom has years and years to run.

Should investors take that market call to the bank? Not if they remember the Ravensthorpe nickel mine debacle. In 2008 BHP Billiton took a $3.7 billion write down when it shut down that Australian mine.

This wasn’t just a case of getting the 2008 top in the commodities cycle wrong—lots of folks (including yours truly) did that.

Ravensthorpe had been announced way back in 2004 and plagued with cost overruns from the start. The cost of the project doubled during construction. BHP finally shut it down in 2008, writing down the book value to $0, when it concluded that operating the mine just wouldn’t pay.

So in our search for clarity let’s look at the reported results for the key commodities of iron ore and copper.

BHP Billiton expanded iron ore production by 5% in the most recent period. Production is up about 25% from three years ago and BHP Billiton has plans to increase production by another 60% by 2013. That strikes me as pretty aggressive and given the plans of other iron ore producers to also increase capacity on roughly that time table, I’d certainly think that 2012 might be a good time to revisit my exposure to iron ore producers such as BHP Billiton, Rio Tinto (RTP), and Vale (VALE).

Copper production climbed by 4%, but that good news—since it was ahead of Wall Street projections—came with a ton of company warnings. At the Escondida mine for example, ore grades are declining and in 2011 production is, consequently, likely to drop by 5% to 10% from 2010 levels. Copper production volumes will be stagnant in 2011 since expanding production in the face of declining ore grades at existing mines will be slow and expensive. On the face of it, Billiton’s production report says that the copper boom has longer to run than the iron ore boom.

If you’re looking to put new money to work in commodities, I’d go with copper and I think there are better copper plays than BHP Billiton—Freeport McMoRan Copper & Gold (FCX)—comes to mind where companies will have to spend less capital to increase production. (For why I like Freeport McMoRan see my post )

Given BHP Billiton’s mix of commodities, if you already own this stock, I’d hold it for 2011 and look to see if it’s smart to start lightening up in 2012. In the longer run, if there is a pull back in 2012 or so, I’d use it as a buying opportunity.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of BHP Billiton, Freeport McMoRan Copper & Gold, and Vale as of the end of January. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at