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Is $40 the next stop for BHP Billiton Limited shares?

Iron ore prices are sagging down around 20% from earlier highs, hanging just over the US$100/tonne mark. The big miners are raising production and exports to keep revenues high.

Can a slowing China support the current export volumes? As the world’s most populated country transitions to a domestic consumer-driven economy, the question remains – where are mining stocks going to?

BHP Billiton Limited (ASX: BHP) has risen almost 13% in the past twelve months to $38.08 a share. That’s about double the 6.7% gain of the S&P ASX All Ordinaries Index (ASX: ^XAO) over the same period. Its management said Chinese demand is expected to hold up over the long-term, yet in the meantime it is strengthening its balance sheet while sales volumes are up.

Here are some reasons why Australia’s largest miner could headed to $40 a share and beyond.

— Low cost production     Its iron ore production costs, like competitor Rio Tinto Limited (ASX: RIO), are the lowest in the industry, so its profit margins can buffer earnings more than Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO), when iron ore spot prices come under pressure.

— Petroleum growth     Iron ore demand could be headed down as supply rises, yet energy demand is growing. BHP can partly offset potential iron ore weakness with oil earnings. It reaffirmed its FY2014 production guidance of 250 million barrels of oil equivalent (mmboe) in its half-year report, including a 75% rise in US onshore oil production.

— Even short sellers like BHP     Jim Chanos, the well-known US short seller who previously took out short positions on Fortescue, told the market his US$4 billion fund management firm Kynikos Associates is long on BHP and Rio Tinto. He said the miner was already taking the right steps to prepare for this anticipated China slowdown.

— Asset sales and lower debt     That ringing endorsement comes at a time when BHP is preparing to sell off some of its nickel assets and pay down debt. Nickel prices are up about 50% since January due to a supply shortage, so the company may get a better sale price of its Nickel West business.

The company is also considering a capital return, so shareholders may enjoy a special dividend or share buyback – either of which could boost its share price.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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