Although BHP Billiton Limited's (ASX: BHP) shares are still sitting on negative returns for the year so far, investors need to be cautious of taking up a position in the "Big Australian".
As I wrote yesterday, there are reasons to suggest the miner could climb to $40 a share in the near future on the back of surging nickel prices. However, they could just as easily plunge back down towards $30 a share should iron ore and coal continue to plunge in price.
While iron ore gained US$1.10 overnight to be trading at US$98.60 a tonne, it is still sitting 27% below its average 2013 price and is tipped to slide as low as US$80 a tonne in the next 12 months. Meanwhile, coking coal and thermal coal prices have also plunged 64% and 41% respectively since mid-2011 while the miner itself has admitted it is not expecting any relief in the foreseeable future.
Although BHP Billiton's operations in both markets remain profitable, any further drops will heavily impact on the miner's margins and earnings. Like others in the industry, BHP is ramping up its production levels of iron ore in an attempt to offset the lower prices, although this strategy will also apply further downwards pressure on the commodity's price. It is on track to produce an incredible 217 million tonnes of iron ore for this financial year.
BHP Billiton is down 0.3% since the start of the year while Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) are down 10.3% and 20.5% in the same time.
A rampaging ASX stock to double your money
Although the shares have dropped in price, the mining sector is still too volatile for my liking – particularly when there are other spectacular opportunities to take advantage of.
