Shareholders of BHP Billiton Limited (ASX: BHP) watched on in amazement as their BHP shares soared to fresh heights in January, continuing a super-impressive rebound that began early in 2016.
But that excitement has likely turned into anxiety more recently. The shares have fallen $4.38 or 15.7% since their peak, and are down 2.8% today alone at $23.57. So, the question is, how safe is your money in BHP Billiton at this share price?
The Pros
BHP Billiton is the typical go-to stock for investors looking for exposure to Australia's mining industry. Not only is it diversified between iron ore, copper, coal and petroleum, it's also a relatively low-cost operator compared to a number of its smaller counterparts. Hence, the rebound in commodity prices over the past year or so has helped to revitalise the group's income statement and balance sheet.
Indeed, the miner had almost US$14 billion of cash on hand as at 31 December 2016, up from US$10.3 million in June 2016. Its loan obligations also declined during that time, putting the miner in a net debt position of US$20.1 billion (an improvement from US$26.1 billion net debt six months previously).
If commodity prices can continue to improve, or even if they remain stable at their current levels, shareholders of BHP Billiton could certainly benefit – both in the form of further capital gains as well as dividends. BHP announced an interim dividend of US40 cents per share for its latest half-year period, up from US16 cents 12 months prior.
The Cons
The BHP Billiton share price has rallied hard since early 2016 when the shares hit a multi-year low price. While at the time it seemed that conditions would continue to deteriorate, commodity prices surprised investors, analysts and industry-insiders alike to the upside, leading to a huge re-rating in the BHP share price. Other miners such as Whitehaven Coal Ltd (ASX: WHC), Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) have benefited as well.
But as you can see on the chart above, the share price has dipped most recently. While some investors will likely see that as an opportunity to load up, it is important to recognise that the fall in share price is likely due to changing sentiment in the market.
It has been argued that the run-up in commodity prices was blown out of proportion, with forecasts suggesting iron ore in particular could be in for a sharp correction in the second half of this year. Indeed, it wasn't long ago that iron ore was threatening to break through US$100 a tonne – now the resource has declined to US$85.06 a tonne, according to The Metal Bulletin, with further falls anticipated. Should that happen, the BHP share price could easily fall below where it sits today.
Foolish Takeaway
If I was looking to gain exposure to the mining sector today, BHP Billiton would likely be the first business I'd look at based on the reasons explained above: it's well diversified, it owns a number of high-quality assets and it is able to produce resources at a far lower cost than many of its rivals.
Unfortunately, it is very difficult to know where commodity prices will go from here. Although they could continue to rise, perhaps pushing the BHP share price to fresh heights in the process, commodity prices could also decline, with BHP Billiton itself unable to intervene if that was to occur.
As such, I'm happy to give BHP Billiton shares a miss at today's prices, and focus on some of the market's other high-quality businesses instead.
