Mining heavyweight BHP Billiton Limited (ASX: BHP) may be heavily diversified, but that hasn't protected it from the volatile iron ore prices. The stock has dropped 68c or 1.8% in early trade after rising by 2c yesterday.
Iron ore fell to a fresh multi-year low of just US$97.50 a tonne overnight, which represents a price drop of nearly 28% since the beginning of the year. It traded at an average price of US$135 a tonne throughout 2013.
With many analysts expecting iron ore to fall as low as US$80 a tonne sooner rather than later, investors are cautious of the impacts that will be felt by the miners. Although BHP Billiton generates much of its revenue from other commodities like coal, copper and petroleum, the drop in price of iron ore will still have a material impact on overall earnings. That is one of the primary reasons why the company is so heavily focused on cutting costs and improving its breakeven price (which some estimates suggest is currently around US$45 a tonne).
Other companies like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO) will be hit even harder given their much heavier reliance on iron ore for revenues. The three stocks are down 1.7%, 4.3% and 2.4% today respectively, while they are down 13.1%, 24.7% and 37.4% since the beginning of the calendar year.
Although the stocks are trading at a heavy discount compared to their prices at the beginning of the year, I still don't believe this is a good buying opportunity for investors. The industry remains far too volatile for my comfort levels and I believe things will likely continue to get worse before we start seeing any improvements.
If you feel you absolutely must have exposure to the sector, BHP is your top choice given its higher level of diversification, however, I still believe there are far greater opportunities to take advantage of in the market.
