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3 reasons why BHP Billiton Limited’s shares are digging deep

BHP Billiton Limited’s (ASX: BHP) shares sunk 33c or 0.9% yesterday to be trading at $37.01 in late afternoon trading. While many had pegged 2014 to be the year BHP Billiton’s shares returned to favour, they have thus far dropped 2.6% compared to the 2% gain by the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).

Here are three reasons why the company’s shares dropped yesterday:

1) The iron ore price has dropped roughly 20% over the last four weeks and is now sitting at its lowest point in nearly 18 months at just US$102.70 a tonne. Although BHP Billiton has a low break-even price for iron ore, the falling price will still impact the mining heavyweight’s earnings.

2) To make matters worse, BHP Billiton, along with its major peers Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Brazil’s Vale, are all heavily ramping up production levels. This strong supply growth is heavily outpacing demand growth which could push the iron ore price as low as US$80 a tonne by next year.

3) There is a general bad mood in the market due to the looming election. The ASX 200 index has dropped 17.9 points to 5442.9 with Fortescue Metals Group Limited and Rio Tinto Limited also trading down 2.5% and 0.3% respectively. Further, the market is also nervously awaiting Chinese industrial production data and retail sales figures for April which will be released on Tuesday.

Why now is not the right time to buy BHP Billiton Limited

Out of the miners, BHP Billiton is by far the safest bet for your hard-earned investment dollars due to its high level of diversification. While I’m watching for a sharp drop in share price to consider adding it to my portfolio, I do not think it is the best option at today’s prices.

Instead, there is another stock which I am very bullish on and is one that top Motley Fool analysts have identified as their #1 ASX pick for 2014 - a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!). Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool's Top Stock for 2014."

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

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