Over the last 10 trading days, shares of BHP Billiton Limited (ASX: BHP) have fallen from a high of $34.29 to just $29.40 – a fall of more than 14%. While many investors would perceive this as being a great opportunity to buy; there are a number of reasons to suggest BHP Billiton is one to avoid. Here are three of those reasons…
- Iron ore is hovering near a six-year low and analysts widely expect it to fall even further over the course of 2015. The simple fact is, miners such as BHP and Rio Tinto Limited (ASX: RIO) are flooding the global market with fresh supplies at a time where demand for the commodity is falling. Lower iron ore prices will impact BHP's profits and thus, drag its share price lower.
- Oil, which is BHP Billiton's second most important commodity, is another huge concern. In another situation where supply far outweighs demand, oil prices have been slammed over the last two days with Brent crude now fetching just US$53.38 a barrel (a six-week low). Unfortunately, some estimates suggest the resource could fall to just US$20 a barrel before market conditions begin to improve.
- BHP Billiton is a low cost producer which will enable it to cope far better than most miners through the commodities downturn. However, its cash flows will still come under enormous pressure which is a key risk for the miner, and could eventually impact its ability to maintain its progressive dividend policy.
Due to its low costs and high level of diversification, BHP Billiton remains my miner of choice. But with the headwinds facing the industry as a whole, it seems that there is still too much risk surrounding the stock to warrant a buy just yet.
