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Deutsche Bank likes BHP Billiton Limited – should you?

Despite the strong headwinds facing the mining sector, Deutsche Bank has reiterated its ‘buy’ rating on sector heavyweight BHP Billiton Limited (ASX: BHP), giving it a price target of $43.50, which is 14% higher than today’s price of $38.04. Meanwhile, CIMB maintains a price target of $42.80 and RBC Capital has reiterated an ‘outperform’ rating on the shares.

Analysts had entered into 2014 largely bullish on the company. Following years of underperformance, they suggested this would be the year the company would make a comeback and reward the shareholders who had remained patient through the low times. So far, that has not been the case with the shares having gained just 5c or 0.1% since the beginning of the year, compared to the S&P/ASX 200’s (Index: ^AXJO) (ASX: XJO) 1.8% rise. Despite the poor start to the year, should you be as bullish as the analysts?

You should look at BHP Billiton as a long-term investment prospect. While it would be nice to see it hit those analysts’ targets within the next 12 months, that happening will largely depend on the price movements of key commodities including iron ore, copper, coal and petroleum, as well as the company’s ability to continue improving costs and productivity.

While costs are expected to be reduced by around US$5.5 billion by the end of 2014, the release of the company’s 3Q operations report on Wednesday also highlighted that it is on the right track to improving productivity. In fact, so improved was its productivity that it raised its full-year production guidance for metallurgical coal and iron ore, which are both used in steelmaking.

However, although shares are not necessarily expensive currently, they are not cheap either. The risk of commodity prices dropping further (which will impact the share price) is high meaning that investors ought to expect volatility.

While BHP Billiton has risen just 0.1% since the beginning of 2014, its primary rivals Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have dropped 7.1% and 8.4% respectively.

Foolish takeaway

BHP Billiton is my favourite mining stock due to its high level of diversification and its future growth prospects. For instance, thermal coal is likely to remain a major energy source in developing economies for decades to come while it is also in a prime position to benefit from a rapidly expanding global population, whereby demand for fertiliser ingredient potash could well soar.

Investors wanting a piece of BHP’s pie may want to either wait for a lower price before hitting the buy button, or else buy in portions. That is, buy some shares now, then buy another parcel or two a couple of weeks down the track, if its price drops in that time, you can buy more at a cheaper rate!

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

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