This Is How You Make Navigating a Bad Market Look Easy

By Markets Fool.com

BHP Billiton Limited (ADR) is one of the world's largest natural resource companies. That hasn't been an easy place to be lately. But this industry giant is far from resting on its laurels or shrinking its business; it's still working hard to become an even better company than it is today. To see the progress it's making, all you need to do is look at the numbers.

Continue Reading Below

Everything's in the dumps
The most prominent thing about the commodities markets today is that so many are trading at relatively low levels. Iron ore, copper, metallurgical coal, and now oil have all hit the skids. For reference, that's the quartet BHP is betting its future on. It's planning to shed its smaller businesses, like aluminum and thermal coal, with the proposed spin-off of South32.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts.

The impressive thing, however, is that BHP has managed to keep its head above water despite the broad-based weakness in its industry, keeping full-year results in the black while many competitors have felt the sting of red ink. Moreover, the company has increased its dividend payments, too, boasting a track record of 10 years of annual increases -- despite the industry malaise.

Part of BHP's strength is by design. By operating in numerous different commodity markets, the pain felt in any one has less of an impact on the whole. But this isn't the entire story, particularly now that almost everything in which BHP trades is facing headwinds.

Continue Reading Below

Getting better all the time
That's where BHP's focus on efficiency and cost-cutting comes in. For several years, BHP has been trimming spending, cutting the capital budget by around 40% between the end of fiscal 2012 and the first six months of fiscal 2015. But cutting isn't how you get better; it's how you spend less money. And spending less can actually hurt you in the long term if what you are doing is cutting important future investments.

That's why it's so gratifying to see that BHP produced record production numbers at 10 of its operations across five different commodities through the first nine months of its current fiscal year. Overall, companywide production was up 9%. This is why BHP is an industry leader -- it knows how to spend less and still do more.

Can't stop this train. Source: Bahnfrend, via Wikimedia Commons.

Importantly, there was production strength across all four of the company's core commodities. Oil production was up 6% year over year, despite a 35% reduction in the number of onshore drilling rigs in the quarter. Copper production was up 2%, led by the company's largest mine, where it was able to increase truck utilization by 14%. Iron ore production increased 16% and was accompanied by record sales volumes. And met coal production was up 14% over the nine-month span, though a planned equipment move left production lower compared to the fiscal second quarter. While all of this puts BHP's operational prowess on clear display, it's still a mixed blessing of sorts.

Too much of everything
Yes, BHP has proven that it is both saving money and investing for the future at the same time. But with prices weak across the board, BHP isn't helping the industry by adding more supply to the market. In fact, its success could help to keep prices weak for longer. However, BHP happens to have very low-cost operations. A great example is iron ore, where the company's Australian unit costs are roughly $20 per tonne. That means BHP can still make money despite the lackluster markets in which it participates.

So, while BHP is helping to cause its own problems, the added revenue from production increases is also helping to support the top line. And while low prices sting, they are far worse for marginal competitors that don't have BHP's low-cost structure. So, in some ways, BHP is clearing the field of weaker players, which should allow the company to gain market share as competitors' mines start to close -- which in turn leverages it to a pricing upturn.

Watch the knife
BHP is proving, once again, why it's a leader in the commodity industry. Less spending and more production is hard to argue with. That said, keep an eye on the cost-cutting, which could eventually start to constrain production if it goes too far. If it ever gets to that point, though, it looks like BHP will have already made large strides in preparing for the next commodity upturn. If you are looking for a one-stop shop in the out-of-favor commodity market, BHP Billiton should be on your short list.

The article This Is How You Make Navigating a Bad Market Look Easy originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.