Shares in BHP Billiton Limited (ASX: BHP) have trended 34c or 1% lower in today's session after the iron ore price plunged to just US$89 a tonne overnight – the first time it has traded below US$90 since 2012.
The iron ore price has now fallen 34% for the calendar year after trading at an average price of US$135 throughout 2013. And it looks like there's more to come…
A number of analysts have predicted a floor price of US$80 in the second half, which represents a further drop of more than 10% from today's price. Worse yet, with Chinese demand weakening and supply growth rapidly increasing, it appears the miners are going to have to get used to years of relatively weak prices.
Currently trading at $35.28 per share, BHP Billiton has now fallen more than 7% since the beginning of the year. Although that drop is nowhere near as brutal as the losses endured by other iron ore miners like Rio Tinto Limited (ASX: RIO), Fortescue Metals Group Limited (ASX: FMG) or Atlas Iron Limited (ASX: AGO) – which are down 15.8%, 31.8% and 50.7% respectively – it's still another setback for shareholders. In comparison, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has risen nearly 1% for the year so far.
So, given the miner's discounted price, is it worth considering as an investment idea today?
Firstly, it should be noted that although BHP Billiton doesn't rely anywhere near as heavily on iron ore as its rivals do, the commodity still acts as its primary generator of revenue. While estimates suggest BHP's breakeven price is around US$45 per tonne, the miner will still make a healthy profit even as the commodity trends lower.
However, the company's overall earnings and margins will certainly be impacted. It seems that investors are becoming less and less hopeful of a recovery in price and now even Australia's most diversified miner is paying the price.
Here's what I think investors should do…
Given BHP's exposure to other resources like coal and potash, I like the miner's long-term prospects. But as iron ore continues to fall in the short-term, I think BHP could well have further to drop as well. Investors may be wiser to remain on the sidelines for an even cheaper opportunity and, in the meantime, explore some of the other incredible opportunities presenting themselves in the sector…
