BHP Billiton: A One-Stop Commodity Shop

The world's largest mining group is raking it in -- and counting on China for its future
The BusinessWeek 50

Five years ago mining seemed an industry in decline. Commodity prices were low, and the outlook was bleak. While most mining companies held off investing, BHP Billiton. (BHP ) took the contrarian approach, plowing $7 billion into 25 projects ranging from iron ore to copper to oil and gas.

Today, with prices for commodities flirting with record highs, the world's largest mining group and its shareholders are reaping the rewards. "Prices are great now. But we committed to and constructed these projects when prices and costs were low," says CEO Charles W. "Chip" Goodyear. Smart move: BHP Billiton is now No. 1 on the BW50 list of top European companies. Goodyear says price volatility is always a challenge, but BHP's strategy hedges risk by investing in a diverse mix of commodities.

Formed from the 2001 marriage between Australia's Broken Hill Proprietary Ltd. and Billiton PLC, a London-based mining house with interests in nickel, coal, and aluminum, the company is now a one-stop commodity shop. Its products range from diamonds and titanium to coal, oil, gas, and uranium. BHP Billiton may not be a household name, but the $31 billion company's products are used to make everything from alarm clocks, golf clubs, and cars to buildings and bridges worldwide.

Goodyear, a former banker, runs the company like an investment fund, spreading the risk across a broad portfolio while applying rigorous risk assessment models to better understand supply and demand trends. "It's not a 'bet the farm' strategy, and it never will be," he says. Although 85% of Billiton's cash flow -- $8.7 billion in 2005 -- comes from single-A-rated countries, the company relies on a mix of projects in a diverse range of higher-risk spots including Algeria, Pakistan, and Colombia -- "places that can scare the heck out of most Americans," Goodyear concedes. "But it's a risk we know we can take as we understand our entire portfolio."

BHP uses sophisticated risk assessment systems similar to the Monte Carlo analysis method employed by scientists in Los Alamos, N.M., in the 1940s to understand the behavior of atomic particles. In this approach, BHP applies countless variables, from interest rates to currency and commodity prices, to any new investment. Goodyear used the method when it made the $7 billion acquisition of Australian mining company WMC Resources Ltd. (WMC ), which has major holdings in uranium and copper. A rival bidder offered $6 billion, but Goodyear reckoned that even if copper prices fell from their current level he could afford to pay more for WMC, since uranium prices tend to move in the opposite direction of copper and BHP's other assets.

The next 12 months will sorely test this ability to assess risk. The metals markets have gyrated wildly on fears of a global slowdown, and BHP Billiton's stock is off 24% since May 1. A big question is China. The mainland's ravenous appetite for raw materials such as copper and iron ore, as well as a steep rise in oil prices, boosted profits by 89% last year, to $6.7 billion. Four years ago, BHP Billiton's sales to China were worth $371 million. Today they're worth nearly $3 billion, and they account for 16% of total sales. Goodyear figures there's still room to run: The long-term needs of China for more metals and oil are still there despite investor fears of a China bubble.

What to do? Goodyear is using BHP Billiton's strong cash flow to position future growth. He's relying on lucrative investments such as Chile's Escondida mine, the world's largest copper mine, which cranks out $1 million in pretax profits per hour, to fund new projects. Some $14 billion has been earmarked to fund 27 different projects. One early-stage project is the Olympic Dam, a major copper and uranium mine in southeastern Australia. Olympic accounts for 35% of the world's known uranium, which is used to fuel nuclear power plants -- and nuclear power is gaining in popularity once more. "In one step, we became the industry's main player in a critical resource," Goodyear says.

By Kerry Capell in London

    Before it's here, it's on the Bloomberg Terminal.