The Motley Fool

Should you buy BHP?

Australia’s largest miners, including BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG) were amongst the market’s best performers on Friday, leading the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to its highest one-day gain in 17 months.

The index gained just over 2% or 96 points to close at 4,791 points on the back of strong performances from our biggest miners. After trading in the red for five out of the previous six days, shares in BHP gained 2.5% to finish the week strongly at $32.91, as competitors Rio Tinto and Fortescue added on 4.7% and 5.4%, respectively.

Whilst Rio’s impressive gain was influenced by strong support from investors regarding the sale of its Eagle project, BHP’s boost blended in with gains across the sector, with energy companies Santos (ASX: STO), Oil Search (ASX: OSH) and Woodside Petroleum (ASX: WPL) also seeing green for the day.

Based on the current value of the miners, analysts and investors alike have posed the question: are they now a good option to add to a portfolio?

A look at BHP

BHP is currently trading on a P/E ratio of 14 and valued at $32.91 per share, after trading at nearly $50 back in 2011. Since then however, a number of factors have changed.

First and foremost, Chinese demand for resources is now significantly lower than in the past as growth in its economy begins to taper off. When combined with a high Australian dollar, international demand isn’t what it used to be. Furthermore, supply of resources, like iron ore, have been on the increase due to more projects now being operated throughout the world.

Together, this has had a drastic effect on the price of iron ore, which is now trading for between US$110 and US$120 per tonne (investors should not be surprised if this value decreases further over the remainder of 2013) – a value far below its average over the last decade. This has greatly affected the company’s profits and, unless they can cut costs, it will be harder for them to return to their profit levels of the recent past.

However, it is expected that our miners will be enormous beneficiaries of a falling Australian dollar. Arrium (ASX: ARI), for instance, is expected to be $132 million better off should the dollar remain around US94c for the year, according to The Age.

Foolish takeaway

Despite signs the dollar should continue to fall, there is still enormous volatility in the price of iron ore and in the sector. BHP is looking more attractive than it has in recent weeks, but until that volatility begins to subside, it may still be wise to wait on the sidelines by adding it to your watchlist.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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