Update BHP Billiton (BHP)

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 http://jubakpicks.com/jubak-picks-50/ )

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? Read more

The key to commodities investing now is idle capacity. And how quickly it gets back into production

In its regular report on June iron ore production, delivered on July 22, BHP Billiton (BHP) gave investors the key to investing in commodities over the next year. Ignore this at your portfolio’s peril. BHP just told us all what to buy, what to avoid, and when.

Ready for those words of wisdom: “Commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”

Let me translate into language useful to investors: Yes, commodity prices are climbing as consumers of raw materials rebuild their stock piles.  And yes, we are seeing what is a real increase in demand and not just a result of inventory rebuilding. But don’t get carried away by short-term spikes in commodity prices. So many commodity producers have idled mines or wells or whatever that any big increase in price will be temporary as it will bring that idled capacity back into the market. And that will depress prices–for a while. Expect, then, a start-stop price chart where the trend is gradually higher, but where the trend is punctuated by spikes and plunges as demand and supply lurch toward equilibrium.

And from that I think investors should be able to figure out what commodity stocks to buy. I’ll lay out three general prices of commodity investing–in the current scenario–in this post. And I’ll give you a stock to buy later today. Read more