BHP Billiton Limited smashed 9% – but is it a buy?

As Australia’s largest and most diversified miner, there is a lot to like about BHP Billiton Limited (ASX: BHP). While its operations are well spread (making it a safer bet than others in the sector), the company is expanding its operations and heavily reducing costs, whilst also fighting its way to be at the forefront of the next mining boom (think potash – a key fertiliser ingredient).

Keeping those positives in mind, its share price has also fallen more than 9% since this time last month when it hit a 52-week high of $39.79, so you might be rubbing your chin thinking that this is an excellent opportunity to buy – surely there is only upside potential from here, right?

Unfortunately, there are no certainties when investing in the stock market and while BHP’s shares could certainly rebound higher over the coming weeks, they are perhaps even more likely to continue their downward spiral.

Currently, there is too much volatility in commodity prices to justify an investment at today’s prices. As a perfect example, take iron ore’s recent 10% plunge over the course of just two trading days. The steelmaking ingredient sank from around US$140 a tonne at the start of the year to just US$104 a tonne, before creeping back up to US$111.90 per tonne on Friday. While some analysts expect it to hover around this price for some time, others like Goldman Sachs have forecast it to fall as low as US$80 a tonne in the not-too-distant future.

Copper is another commodity which has plunged in value. It is currently sitting below US$3 a pound, while it is also anticipated to fall further.

As is the case with any of the other miners such as Rio Tinto Limited (ASX: RIO) or Fortescue Metals Group Limited (ASX: FMG), BHP has absolutely no control over commodity prices, and if commodity prices fall, so do their margins and therefore profits.

Foolish takeaway

There is no denying that BHP is a quality company that I would like to have in my portfolio, but only if I could buy it at the right price. While I am running the risk that that opportunity may never present itself, I cannot get comfortable with the risks involved in the investment at today’s prices, and the reliance that I would be placing on commodity prices regaining their strength.

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

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