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The future looks bright for BHP Billiton, which we expect to outperform its peers in the Mining sector. We are forecasting prices for bulk and metal commodities to rise in 2007, which would suit BHP’s operations: mining coal, iron ore, copper, nickel, manganese, aluminium, diamonds, silver and titanium. It also has substantial interests in extracting oil and gas; in fact, around a fifth of the group’s pre-tax profits come from petroleum. We expect oil prices to remain higher than the market expects next year, which again would benefit BHP. BHP’s key petroleum assets in Australia and the Gulf of Mexico are highly regarded within the industry, and overall petroleum production is expected to grow by over 40% by 2010.

Current trading prospects are looking good. Robust demand growth – led by the emerging economies, such as China – is expected to exceed supply growth, as shortages of labour and equipment are limiting new supply. Meanwhile, the group is in a good financial position and has strong cash-flow generation. There is a $3 billion programme of share buy-backs over the next 18 months, and we expect the dividend policy to improve.

Because the group operates around the world, it is exposed to currency fluctuations, as well as the risk of political instability. The other major risk to profits would be a fall in demand if the global economy slows. Even after factoring all of this into our estimates, we think that, on a fundamental basis, a fair value for the shares would be around 1330p, which offers considerable upside on the current share price. However, the actual share price will be significantly affected by commodity price volatility, so we don’t necessarily expect the shares to rocket up over the next few months. But over the longer term an investment in BHP Billiton could turn into your little gold mine.