David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Mining has always been a business of booms and busts. In a story that's been told for more than a century, one founder of BHP Billiton had so little faith in its prospects that he traded away stock on the outcome of a card game. Fast-forward to 2011, and the same business briefly had the world's largest market capitalization after Exxon Mobil, PetroChina and Apple.

The Big Australian
World's biggest companies by market value, as of April 11, 2011
Source: Bloomberg

Now, the world's biggest miner is in the doldrums. Last month's $6.4 billion annual net loss was the deepest in BHP Billiton's history. Worse still was an admission alongside the results that a coming glut of steel scrap may lead to the obsolescence of blast furnace technology. That once fringe-y scenario has been increasingly mooted by market watchers, but it's rare to hear it voiced by a company that gets nearly 100 percent of its profit from steelmaking materials.

The dismal outlook is spreading to credit analysts, too. BHP's debt metrics will be below their target ranges in the fiscal year through June, according to S&P and Moody's, even as rivals Rio Tinto, Vale and Fortescue Metals have been upgraded.

That's symptomatic of a deeper malaise. Among its peers, BHP has the highest forward price-earnings ratio, but the lowest return on invested capital, suggesting shareholders' estimation of the stock is running some way ahead of the company's demonstrated ability to make productive investments.

Something for Nothing
BHP Billiton's attractiveness to investors isn't matched by its ability to make money from its own spending
Source: Bloomberg

Of BHP's three major divisions, only iron ore is generating more operating income than it's sucking up in capital spending. About $3.1 billion exited the petroleum unit last year in capex and adjusted operating losses, while copper capex that ran well ahead of earnings left shareholders another $1.7 billion short.

This isn't reason to fret, yet. BHP is the biggest producer of 2016's best-performing hard commodity, coking coal -- worth 264 percent more at spot prices now than it was at the start of the year. Thermal coal, iron ore, natural gas and crude oil, four of its other major products, are also up more than 25 percent this year. Only copper, which accounts for about a quarter of sales, has failed to join the party. Furthermore, analysts expect net income will rise and net debt will fall in every one of the coming four financial years, according to data compiled by Bloomberg.

Return to Sender
Only Vale has a worse ROIC/WACC ratio than BHP among its major peers
Source: Bloomberg
Note: ROIC/WACC ratio is a measure of economic profit, the return on invested capital divided by the weighted average cost of capital. Figures below 1 indicate the company isn't returning its cost of capital.

The bigger problem lies further off. Five years ago, when BHP was at its peak, it seemed to have a finger in every raw material around the globe. In theory, that gave it the same sort of benefit fund managers get from diversity: Weaker returns when particular constituents surge, but greater resilience when they plummet.

After spinning off most of its base-metals business into South32, BHP is looking less like a passive index fund and more like an active manager with a certain point of view.

If the world continues to demand more blast-furnace-produced steel to stiffen buildings and petroleum to power transport over the next few decades, BHP has the goods. On the other hand, if Saudi Arabia is right about the future of petroleum and BHP itself is correct about blast furnaces, the company risks being left with few world-class assets beyond its giant and expensive copper mine at Escondida.

Should the current global hunger for heavy construction wane, Rio Tinto will still have a world-beating aluminum portfolio and, more importantly, the bauxite ore from which it's made. Anglo American will be sitting on the world's best diamond and platinum businesses, and even Canada's Teck will have a zinc unit that's made profits year in, year out. 

Making It
Revenue share of major miners, latest fiscal year
Source: Bloomberg
Note: Some categories have been amalgamated. "Other base metals" includes aluminum, zinc, and nickel. "Precious metals and specialized materials" includes platinum, diamonds, and Rio Tinto's titanium, salt, borates and uranium units. "Iron ore and coal" includes both coking and thermal coal.

Such operational commodities are used again and again and can form a great basis for a sustainable mining business. BHP's problem is that it's leaning too heavily on capital commodities such as iron ore and coking coal, which are used only once.

The last thing shareholders want to see is more heavy investment and acquisitions, but if BHP wants to survive another century, it's going to need to spend up to shift focus. Miners are like sharks: If they don't keep moving forward, they die.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at

To contact the editor responsible for this story:
Katrina Nicholas at