At the close of Tuesday's trading, shares of resources giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have been hit hard, down 4.7% and 1.5%, respectively.
If you asked a group of investors if they'd buy BHP shares for less than $28.00 (the current price) a year ago, the answer probably would've been an overwhelming "yes".
So what's changed?
The answer: A lot.
Between December 2013 and December 2014, thermal coal prices dropped around 25%, iron ore dropped 46% and crude oil fell 23%. In addition throughout the 2014 calendar year, the price of copper fell over 15%.
For Rio, a falling iron ore price is bad news. It accounted for around 47% of revenues in FY13 and a whopping 86% of underlying earnings. Copper, its next most profitable division, accounted for 11% of revenues and just 7.2% of the group' underlying earnings.
Whilst Rio has a very low cost base in iron ore and is unlikely to go bust, there could be more pain in store for shareholders if the steelmaking ingredient continues to freefall.
For BHP, iron ore accounts for 31.7% of revenues and 53% of underlying EBIT (earnings before interest and tax). Petroleum accounts for 22% of the top line and 23% of underlying EBIT. In the 2014 financial year, BHP realised a net average oil price of $US102 per barrel (bbl). Currently, Brent crude oil is priced at $US53/bbl.
Foolish Takeaway
In the year ahead, some analysts expect oil prices to continue falling whilst others are forecasting prices to bounce back. If they do BHP Billiton will look very cheap.
However with both iron ore and coal prices tipped to stay lower for longer, holding off from buying BHP and Rio could prove prudent, at least until we can glean an insight into the prices falls at the next reporting season.
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