It's been another encouraging day for shareholders of BHP Billiton Limited (ASX: BHP) with the stock rising another 2.3% over the course of the session. It's now trading at $33.25 per share, up more than 15% since its low on 14 April.
Today's rise can likely be attributed to an announcement that the Brazilian-based iron ore giant Vale made on Friday. The miner said that it would consider reducing supply by up to 30 million tonnes per annum for the next two years in order to bolster the commodity's price. That's great news for the world's producers who have watched the commodity lose more than half its value since January 2014.
On another encouraging note, oil, which is BHP's second most important commodity, has also gushed higher in recent months. As has been the case with iron ore, markets around the world have become comfortable with the supply and demand imbalance, with many falling into the assumption that prices may have finally found a bottom.
While shareholders of BHP Billiton have made a quick gain over the last three weeks or so, that could ultimately prove to be a costly assumption for investors considering jumping into the sector now. Even the Big Australian presents as a big risk to their wealth, especially after its recent run-up in price.
Should you buy BHP Billiton today?
Investors could certainly argue that BHP Billiton is in a better position than any other miner out there, including Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG). To begin with, it enjoys the highest level of diversification in the world, it maintains low operating costs and is in a position to continue improving its cost base and efficiency measures.
I would agree on each of those points.
In saying that however, BHP Billiton is no different from any other miner in the respect that it also relies on high commodity prices to maintain solid margins and to achieve growth in group earnings. The unfortunate fact is that although commodity prices have rebounded recently, the difference between global supply and global demand looks set to widen in the long term, which could materially impact the miner's earnings, and therefore its share price.
Should that scenario play out, the miner's dividend commitments could also become compromised which would almost certainly spark outrage amongst its investors. BHP could be forced to either take out more debt to continue increasing its shareholder returns, or else abandon the policy altogether and suffer the wrath of the market (you don't want to be holding the shares if/when that happens).
Given the risks facing the sector, I would actually suggest that now could be the time to consider decreasing your stake in BHP Billiton, rather than buying more. Although the stock could continue to benefit in the near-term should iron ore prices continue to rise, the long term isn't looking as promising, whereby the stock could act as a serious hindrance on your overall stock market returns.
