Although the S&P/ASX 200 (INDEXASX: XJO) has thus far managed to edge slightly higher, shares of BHP Billiton Limited (ASX: BHP) have dropped a further 0.2% today after the spot iron ore price took another turn for the worse overnight.
Following weeks of heavy declines, the steelmaking ingredient fell a further 1.1% to just US$77.70 a tonne. The commodity is now trading at its lowest level in more than five years while it has dropped an incredible 42% since the beginning of the year.
With BHP's shares now trading at $33.65, is the stock a safe bet for Aussie investors?
Firstly, it should be noted that BHP Billiton isn't going to go out of business any time soon. While the tumbling prices spell trouble for the nation's smaller miners, such as Mount Gibson Iron Limited (ASX: MGX) and Atlas Iron Limited (ASX: AGO), it is estimated that BHP's breakeven price is around US$45. As such, it will still make a nice profit even at these depressed levels.
However, investors also need to be aware that iron ore is BHP's biggest generator of earnings. Although the miner is ramping up its production levels (which is helping to drive costs lower), its margins could still be squeezed which could impact overall profitability.
Luckily, BHP Billiton is the biggest diversified miner in the world, meaning that its risks are spread across various markets. In fact, iron ore is just one of its "four pillars" with coal, copper and petroleum also contributing their fair share of support.
Should you buy?
Given its high level of diversification, I've always said that BHP Billiton is the safest stock for investors wanting to gain exposure to Australia's mining industry. However, I also believe that its shares will remain under pressure until such time as volatility begins to subside in the market. As such, investors may be best to remain on the sidelines, for now at least.
