Shares in the world's largest miner BHP Billiton Limited (ASX: BHP) have dropped below the $34 mark today for the first time since July 2013 as the broader market continues its plunge. Currently trading at $33.76, the miner has dropped 15% over the last five weeks while it is sitting 6.1% in the red over the last 12 months.
Its recent dive is sure to have some investors wonder whether now is the time to buy. Before you acquire any shares however, here are some important points to consider…
Iron Ore
First and foremost, the global iron ore situation needs to be looked at. Thanks to a sharp increase in supply, combined with diminishing Chinese demand, the steelmaking ingredient has dropped nearly 42% since the beginning of the year and is now valued at just US$78.60 a tonne. This is nearly enough to put most smaller miners out of business.
It should be noted that BHP Billiton is far better equipped to cope with the lower prices, and the miner could thus benefit in the long term as more competitors are squeezed from the market. However, it still generates the majority of its earnings from the commodity, so its margins and overall profitability could be hit hard in the short-to-medium terms.
Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and various other iron ore miners have also fallen hard as a result of the tumbling prices.
Coal
Coal is also acting as a significant drag on BHP's overall earnings. Although demand for the resource is tipped to strengthen over the coming decades, it is plunging in price right now due to a global oversupply, while traditional users like China and India are also moving towards alternatives such as gas and oil.
The BHP Billiton Mitsubishi Alliance (BMA) announced just last week that roughly 700 jobs would be removed from the business in an attempt to reduce costs and improve overall productivity. In other words, the tough market conditions are likely to continue for the foreseeable future.
Corporate Governance
Investors were extremely disappointed after the miner failed to announce a much anticipated share buyback program last month. The market had been hoping for around $3 billion worth of shares to be repurchased which would, theoretically, drive the share price higher over time to reward patient shareholders.
While such a program could certainly be announced in the coming year or two, it was probably the right decision not to announce one just yet considering the uncertainty facing the sector.
Demerger
Investors should also consider the miner's planned demerger which would see non-core assets spun-off into a new entity. Such a move would likely help unlock significant shareholder value in that both entities would be able to focus on their own key business areas.
A better bet than BHP Billiton
Although BHP Billiton's shares are trading at their lowest price in more than a year, I'd still be inclined to remain on the sidelines until conditions in the iron ore market settle down. While I like the miner's long-term prospects, I think investors will be presented with an even more compelling price in the coming weeks or months.
