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BHP Billiton Ltd. (NYSE ADR: BHP) is the largest and most diversified mining producer in the world. And the company has had the foresight to acquire assets that provide access to the highest-potential minerals and commodities on the planet.
Other than lithium – "the next oil," which will skyrocket with pure electric car production starting next year – BHP has leading positions in key low-cost mineral deposits around the world.
The company's highly disciplined management has afforded it consistent profitability and a very strong balance sheet. That has allowed BHP to take advantage of the economic downturn by cherry-picking mining properties around the world.
In June, for example, BHP reached a $116 billion deal with Rio Tinto PLC (NYSE ADR: RTP) that will allow the two mining giants to merge their Western Australia iron-ore operations. Also, they are in a friendly $200 million takeover of United Minerals, which has deposits adjacent to a large BHP mine.
Deals like these create strong long-term value for shareholders and deliver results. And, in BHP's case, they also help the company to fulfill it's long-term mandate of capitalizing on booming demand in the emerging markets, which account for 15% of the global economy and which are growing much faster than the rest of the world.
China, in particular, needs to grow its economy at 8% in order to employ the 18 million people that join its labor force each year. And with international reserves of $2.3 trillion and no debt, Beijing can dial up its own growth number.
China's vast international reserves and solid balance sheet gives it what I love to see when analyzing countries: varying degrees of freedom. That is, China has many economic and policy options to control its own destiny, instead of being dependent, as Warren Buffet likes to say, "on the kindness of strangers."
And these policies have been so effective that China is already starting to consider reining in some of the stimuli that the central government deployed just after the crisis began.
But do not be alarmed. Beijing's requirement that the economy grow at a rate of at least 8% a year will continue to afford investors with a tremendous potential for profit – and certainly more opportunities than in countries still struggling to emerge from the financial crisis.
What's more, China's stimulus has already been effective in driving domestic consumer demand. By October of last year, the vast majority of China's growth was coming from internal investment and demand, rather than from exports. So the economy is indeed making the desired transition.
That means there will continue to be a lot of new buildings, roads, cars, refrigerators and many other things that require not only electricity, but steel to produce. Steel, of course, is produced using iron ore, whose supply is highly concentrated among three players. BHP and Rio Tinto are two of those three, and the final player is Vale SA (NYSE ADR: VALE).
When you consider China's rabid demand for large amounts of raw material, it's no surprise that Beijing is reaching long-term supply agreements with companies like Vale, Rio Tinto and BHP.
But it's not until put China's strongly emergent consumer demand together with the precipitous drop in the value of the U.S. dollar that you get the complete picture.
You see, in the absence of an alternative reserve currency, real assets are a nice hedge against U.S. dollar weakness. And if – like China – you have $2.3 trillion in international reserves, you need some sort of portfolio diversification.
What makes this investment premise even better is that China is not the only positive emerging market story: Brazil, India and Russia also look strong. Hence, with global growth accelerating – and a U.S. currency depreciating – commodities such as minerals are red hot and getting hotter.
The rise in consumer purchasing power in China, India, Brazil, Russia and other emerging economies will lead to a sharp spike in electricity consumption as an enormous wave of new consumers buy televisions, washing machines, refrigerators and other consumer electronics.
BHP sees energy demand growing at an annual rate of 8% in China and 7% in India. And it has wisely positioned itself to capitalize on this trend.
Coal is the most widely used energy source in the world, accounting for about 40% of global energy production. And BHP is one of the world's largest coal producers, with mines in South Africa, South America, Australia, and the United States. Also, it's fair to say that demand for coking coal, which is used to fire steel smelters, will rise exponentially when steel production recovers.
BHP also owns and operates Australia's Olympic Dam, which has the world's largest uranium deposit.
At $71.71 a share, BHP's stock is trading at 19 times earnings and is essentially at the top of its 52-week range. In fact, the shares have almost tripled from their 12-month lows.
However, the company is bound to surprise to the upside as the dollar devalues and the global economy accelerates next year. Technically, the stock is in a solid uptrend. Given the sizable gains the stock has posted this year, you might see some correction between now and year end, which would be a superb opportunity to add to your initial position.
Recommendation: Take an initial stake in BHP Billiton Ltd. (NYSE ADR: BHP) now, and look for any weakness between here and year-end to average into a full position (**).
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in BHP Billiton Ltd.
[Editor's Note: Commodities are hot. In some cases, white hot.
Oil, gold and silver are the hot commodities of today. But the shrewdest investors will look toward the horizon, and try to project just what the commodity profit plays of the future will be.
If you need help, just ask Money Morning's Horacio Marquez.
As worries about oil escalate – whether those worries are about future supplies, future prices or global-warming – more and more muscle is being placed behind alternative power technologies. That's especially true in the hybrid vehicle market, where a specific technology has emerged as the clear leader.
The technology is lithium-based rechargeable batteries, and its emergence is sending lithium demand skyrocketing.
The profit potential of this market is stunning – but only for investors who can figure out the right way to play it.
Here's the thing: Marquez – a Money Morning contributing editor who also edits the Money Map VIP Trader – has uncovered the lithium-tech leader.
This company is a global player with a solid market cap and is well known within the hybrid industry. But surprisingly few investors know about the company, or have ever even heard its name.
To learn more about this company – to get in ahead of the masses – and to find out more about Marquez's Money Map VIP Trader, please click here.]
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With Rio Tinto's Snub of Chinalco, Aussie Backlash Against China's New Capitalists Continues to Escalate.
- Money Morning:
Buy, Sell or Hold: HSBC Holdings PLC (NYSE: HBC) Has Absorbed the Financial Crisis' Impact and Is Now Exploiting It.
BHP Launches $189 Million Takeover of United Minerals.
Olympic Dam Mining Project.