Investors who have held onto their BHP Billiton Limited (ASX: BHP) shares over the last few years have every reason to be getting fed up with their returns (or lack thereof, for that matter).
The stock is down another 1.6% today and is trading at just $33.71. That's slightly better than where it was last week, but still a long way off its highs from early 2011 where it nearly breached the $50 level. Throw in poor capital management decisions as well as tumbling commodity prices along the way and investors' disappointment is completely justifiable.
Although the stock has been a constant source of disappointment in recent years, I would urge you not to sell your shares. Here are three reasons why you should hold onto them for a while longer.
1) First and foremost, let's not forget about Warren Buffett's two rules to investing. "Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1". As painful as it might be to not sell, now certainly doesn't seem like the right time to sell. Aside from having lost roughly 32% since their 2011 highs, the shares have also declined heavily in recent weeks as a result of a crashing iron ore price. The shares should climb over time and reward those investors who remain patient.
2) Iron ore is BHP Billiton's largest revenue earner, so a falling price will definitely impact the miner's overall earnings. But BHP Billiton is also in a far better position to cope with these lower prices than most other miners – particularly those with higher costs such as BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX). Management has already indicated that it has accounted for a lower price environment in the future and is heavily ramping up production rates to offset those effects.
3) Speaking of greater production, the miner yesterday delivered its operational review for the first quarter. The miner reiterated that it was focused solely on maximising the value of existing infrastructure which will enable it to reduce costs heavily. As an example, it hopes to reduce its iron ore production costs by more than 25% to less than US$20 per tonne by FY17. This will bode well for the company and its overall profitability.
Although investors shouldn't sell their BHP shares, I don't think now is the right time to buy either. Given how volatile the iron ore price has been, the shares could certainly fluctuate in the coming weeks or months which could give investors an even better buying opportunity. Stay tuned…
