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The big BHP Billiton Limited dilemma: To buy, or not to buy?

If there’s one thing that can be said for BHP Billiton Limited (ASX: BHP), it’s that the stock is at least trading based on fundamentals.

While the share prices of various other ASX blue chip companies are sitting at record highs – largely thanks to their high dividend yields in an otherwise low interest rate environment – BHP has dropped considerably in the wake of a tumbling iron ore price.

In fact, it was only on Friday last week that it recorded a fresh 16-month low at just $31.52. That reflects a 17% decline since the beginning of the year, compared to a 0.9% decline for the benchmark S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the same time.

Although BHP Billiton is better equipped to cope with lower iron ore prices than any other miner – thanks to its high level of diversification and low cost operations – its share price will still remain susceptible to the commodity’s fluctuations.

While it is currently changing hands for US$70 a tonne, it has been speculated it could fall below US$60 a tonne next year which would apply further pressure to BHP’s operating margins. If that situation were to play out, BHP’s shares could be expected to fall even further.

In saying that however, BHP has outlined plans to further improve efficiencies and reduce costs, which will help bolster its earnings and share price. This will see BHP benefit from $4 billion in productivity gains – much of which will be recognised in its iron ore and coal divisions. You can read more about BHP’s productivity improvements here.

Should you buy?

Based on its current valuation, BHP is certainly an intriguing investment prospect. As it continues to explore ways to improve efficiencies, it will also look to deliver greater returns to shareholders which will only improve the stock’s appeal amongst investors.

However, until the iron ore price’s volatility begins to subside, there is still plenty of downside risk for the miner’s stock. As such, investors would be wise to add the stock to their watchlist and wait for an even more appealing investment opportunity. Until then, there are plenty of great alternatives worth exploring.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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