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BHP Billiton Limited (ADR) (BHP), Vale SA (ADR) (VALE): This Diversified Global Miner’s Too Cheap to Ignore

Vale SA (ADR) (NYSE:VALE)Softening demand for commodities, on the back of China’s slowing economy, has hurt the profitability of all the major mining companies, creating a sentiment-fueled selloff of mining stocks. This has driven down the share prices of all the major miners, with the world’s largest miner, BHP Billiton Limited (ADR) (NYSE:BHP) BHP Billiton plc (ADR) (NYSE:BBL) down by 29% for the year to date. Both diversified global miner Rio Tinto plc (ADR) (NYSE:RIO) and Brazilian iron ore heavyweight Vale SA (ADR) (NYSE:VALE), have also seen their share prices plunge to be down by 27% and % respectively. But BHP, a diversified miner global miner that can leverage significant economies of scale from its dominant market position, now appears oversold.

One of BHP Billiton Limited (ADR) (NYSE:BHP)’s key strengths — particularly in comparison to Vale SA (ADR) (NYSE:VALE), the world’s second-largest mining company — is its diversified operations. These see BHP Billiton Limited (ADR) (NYSE:BHP) mining and selling a range of commodities, including petroleum, aluminum, base metals, and iron ore, as the chart below illustrates.

Product BHP Percentage of Revenue Rio Percentage of Revenue Vale Percentage of Revenue
Petroleum 21% 0% 0%
Aluminum 11% 20% 0%
Base Metals 19% 13% 16%
Diamonds 1% 8% 0%
Iron Ore 28% 48% 69%
Manganese 3% 0% 0%
Metallurgical Coal 9% 0% 2%
Energy Coal 8% 11% 0%
Fertilizers 0% 0% 7%
Logistics Services 0% 0% 4%

Source data: BHP Report for the half-year ended Dec. 31, 2012; Rio 2012 Annual Report; Vale Q1 2013 Financial Report.

Of the big three miners, BHP Billiton Limited (ADR) (NYSE:BHP) has the most diversified production, making it the least reliant on any one particular commodity such as iron ore to drive sales and profitability. As a result, BHP generates less than a third of its revenue from one of the hardest-hit commodities to date: iron ore. In contrast, Rio Tinto plc (ADR) (NYSE:RIO) relies on iron ore to generate almost half its revenue, and Vale SA (ADR) (NYSE:VALE) over two-thirds. The value of this diversified production base becomes even clearer when you consider that BHP Billiton Limited (ADR) (NYSE:BHP) generates a fifth of its revenue from petroleum, and another fifth from base metals, including gold and silver.

This allows BHP, unlike Vale SA (ADR) (NYSE:VALE) or — to a lesser extent — Rio Tinto plc (ADR) (NYSE:RIO), to mitigate the risks that a declining iron ore price poses for its sales and profitability. This is an important point, because for the year to date, iron ore has already fallen by 28% to $114 per metric ton, and it is expected to fall farther. Furthermore, BHP Billiton Limited (ADR) (NYSE:BHP) is able to defray much of the political and economic risk associated with the mining industry, because the majority of its revenue is generated in the politically stable countries of Australia and the U.S.

Vale SA (ADR) (NYSE:VALE) obtains the majority of its revenue from Brazil, where the government has shown a disturbing predilection to intervene in the economy, implement protectionist measures, and interfere in the business sector. In addition, Rio Tinto plc (ADR) (NYSE:RIO) derives a considerable minority portion of its revenue from unstable frontier markets such as Mongolia and Mozambique.

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