BHP diversifies but still a miner in market's eyes

Both these companies deserve their spots on the market capitalisation ladder, but they have nothing in common other than the fact that what they produce is in high demand.

Where they will sit on this league table in, say, five years will be testament to their ability to read their respective markets.

The immediate response to the resignation of Jobs was a more than 5 per cent fall in the Apple share price - this despite the fact that people had been waiting for this shoe to drop for a year. Jobs has been extremely ill and during the past few months has kept the CEO's title but has rarely been seen.

Inside Apple, Jobs was not just the key man, he was the man. As one investor noted yesterday, Jobs was Apple and Apple was Jobs.

Although he will stay on with the company in the chairman's job, how much of a contribution he will be able to make is debatable.

The success of Apple has been a story of innovation and marketing that is without peer - products that sometimes copied, usually refined but always captured the imagination of the consumer.

It was the textbook growth story of the past 15 years.

The sustained level of earnings growth from a company that relied on innovation is in itself highly unusual. But it was this constant improvement trajectory that earned it a valuation that put it at number two in the world measured by market capitalisation.

BHP Billiton, by contrast, is not a company that has needed to reinvent the wheel. However, over the past five years it has been blessed by having an array of mineral resources that are in acute demand from several developing economies, including China.

For the most part the booming profit growth that BHP Billiton is experiencing is built on legacy assets built over decades.

The growth in demand for these resources has not yet been matched by supply and in some sectors, such as iron ore and coal, this may not happen for at least another five or 10 years.

The major investment in supply has been a fairly recent occurrence.

BHP and arch-rival Rio Tinto have now engaged in large scale capital expenditure to boost supply but it will still be a few years before this comes on stream.

BHP took advantage of a conservative balance sheet to continue some level of investment during the global financial crisis but has since stepped this up. Thus the bulk of BHP's bloated cash flow comes from improved prices for its products rather than much of an increase in the volumes sold.

The issue for BHP is that the price earnings ratio on which it trades does not reflect a market view that this great fortune can go on without risk.

Investors are concerned that if China's growth falters, from United States and European contagion, the company might also deflate.

Traditionally the price earnings ratios of mining companies reflect a boom-bust cycle rather than the more consistent profit profile produced by industrial companies.

But BHP argues it now has a more reliable source of income, given that its portfolio of commodities is more diverse. It wants to market itself as an industrial company dressed in a commodity company's clothing.

And here is why.

Iron ore made up 68 per cent of Rio's earnings before interest, tax, depreciation and amortisation, however, it contributed just 37.5 per cent to BHP.

The company says the linear nature of its dividends - they are stable or increase - is evidence of its earnings sustainability.

The fact that it continues to invest during the cycle further backs up this position. BHP also employs some degree of capital management and has bought back shares.

All are strategies used to iron out the cyclicality of a typical commodity business.

BHP takes the view that China will become increasingly less reliant on export earnings as demand from its rising middle class continues to pick up, and that this will be helped by breaking the long-held pattern of excessive saving as middle-class welfare systems like health care and superannuation emerge.

China's current phase of development requires raw materials such as iron ore and coal to make steel, and this will move into demand for middle-class products such as

white goods.

As Asian and Latin American economies continue to develop so will their requirements for energy and protein.

The BHP map involves investing across a variety of these assets to accommodate each new stage of development. This explains the recent investment in US shale gas company Petrohawk, the tilt at Canada's Potash and development of uranium.

There is plenty of logic in the strategy but not everyone agrees with the particulars. There was certainly some degree of scepticism about the price paid for the latest foray into shale gas.

Its also fair to say that despite the grand plan to put capital into counter-cyclical investments BHP is generally viewed as a stock whose massive returns are the result of the high prices it now receives, primarily for its iron ore.

The company's share price fall from more than $49 four months ago to yesterday's close of $38.61 suggests the market is responding to fears that BHP remains hostage to the fortunes of the now skittish broader international economy