Shares of BHP Billiton Limited (ASX: BHP) were slammed after the mining heavyweight failed to announce a share buyback program late last month – an initiative that had been widely expected by investors and analysts alike. BHP's shares are now trading at $35.68, which is more than 10% below their price on the eve of the company's results announcement.
However, when revisited, its decision doesn't seem like such a bad one at all. Sure, it would have been nice for shareholders to be rewarded for their patience. After all, the stock has underperformed the broader S&P/ASX 200 (INDEXASX: XJO) for a number of years. But at the same time, it is even more important that the miner retain a strong financial position as the industry continues to transition towards greater supplies and lower margins.
Since BHP reported, the iron ore price has fallen considerably and is now fetching just US$83.60 a tonne, its lowest level in more than five years. Iron ore generates the largest portion of BHP's overall earnings and, although it is focused on improving costs and productivity, the miner's margins are still being squeezed.
Unfortunately, conditions don't look like improving any time soon either. Some analysts are even suggesting the commodity will fall as low as US$75 a tonne in the coming months, which will surely force some of the nation's junior miners out of the market.
Perhaps another reason the miner chose not to return more capital to shareholders is that it failed to hit its net debt target of US$25 billion. As at June 30 2014, the miner's net debt still stood at US$25.8 billion, although I would expect it to fall below its target during this half-year period.
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Given its high level of diversity, BHP Billiton would be my pick of the bunch for exposure to the iron ore sector. However, with conditions remaining volatile, I wouldn't be surprised to see its shares sink even lower than today's price.
