It's hard to imagine many metal miners who aren't glad to put this year in the rearview mirror. Worries about Chinese demand and inventory have investors worried about copper, iron ore and met coal prices, and the global economy offers little counterweight to that reliance on China. Although it's a well-run company that generally manages its capital well, BHP Billiton (NYSE:BHP) is still a prisoner of its markets - if commodities rebound in 2013, so too will the stock.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Fiscal 2012 Ends In-Line
BHP Billiton reported basically the numbers that investors were expecting, though that's not to say it was a strong end to the year. While higher energy prices helped a bit, weaker prices for iron and copper definitely pinched. Revenue for the second half of the year declined 7% from the first half, while underlying EBITDA and EBIT fell 20% and 26%, respectively. Although base metal profits were actually up sequentially (by 20%), iron ore was down 20%, petroleum was down 39%, and the company saw a huge drop in profits from met coal. It's well worth repeating that these numbers were pretty much in line with expectations, so it's unlikely that the stock will react dramatically.

SEE: Oil And Gas Industry Primer

Shuffling the Budget
Investors pay careful attention to the capital spending plans of major mining companies like BHP Billiton, Rio Tinto (NYSE:RIO), Vale (NYSE:VALE) and Anglo American, and with good reason. Not only do their plans ultimately feed into the demand outlook for companies like Caterpillar (NYSE:CAT), Komatsu (OTC:KMTUY), Atlas Copco and Joy Global (NYSE:JOY), they also go a long way toward establishing future supply-demand projections.

To that end, the biggest news from the BHP release was that the company is deferring its Olympic Dam copper project in South Australia. This project was estimated to cost anywhere from $20 billion to $30 billion to develop, and though the company is not abandoning the site outright, it seems that management wants to find a less capital-intensive means of exploiting the reserves here.

Although this news was not a major surprise, it could have some interesting far-reaching effects. I cannot imagine that Freeport-McMoRan (NYSE:FCX) is sorry to see the delay/deferral of a major copper project in the same hemisphere as its Indonesian assets. At the same time, I wonder what this says about the rising cost of mining projects in Australia and whether it will lead other companies to curtail projects built around copper, iron ore and coal. This news could be incrementally positive for companies like Peabody (NYSE:BTU) or Vale, which either have production under way or projects in lower-cost regions of the world.

It's worth noting, though, that BHP will still be spending a lot of money on resource projects in the next year. Not only will the company be drilling more in the Permian, but it plans to expand copper (Escondida), met coal and oil/gas production (including Gulf of Mexico assets).

SEE: 5 Biggest Risks Faced By Oil And Gas Companies

The Key is Always the Same
Not surprisingly, the biggest unknown with BHP Billiton is the price direction of commodities like iron, copper and coal. If China can resume a growth/consumption trajectory, inventories will dwindle and prices will head up again. There's a school of thought, though, that the best years of the boom are over, and that China simply does not need to consume resources like it has in recent years. I don't really believe that - there is a lot of economic development left to do outside of the eastern coast, to say nothing of what remains to be built in countries like Brazil, Indonesia, India and Vietnam. Perhaps the pace of the demand won't be as ravenous as before, but it's hard to imagine demand not picking up over the next couple of years.

SEE: Investing In Oil And Gas UITs

The Bottom Line
Although bargains can be found in companies focused on petroleum, iron and copper, BHP Billiton does not look dramatically cheap today. Even if the stock deserves an average forward EBITDA multiple (at a time when many focused companies trade at lower-than-average multiples), the stock looks maybe 15-20% undervalued today. That's not terrible, I'll grant, but I think investors willing to shop a little more thoroughly can find better bargains in the resource sector.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Economics

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Savings

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  5. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!