Shares of BHP Billiton Limited (ASX: BHP) have fallen 1.5% today and are trading below $29 for the first time since January. They're currently trading at $28.98 which compares to their recent high of $34.29, achieved at the beginning of March.
So What: Although iron ore and oil prices both rose overnight, investors are clearly paying more attention to the bigger picture.
As the world's major iron ore producers continue to flood the market with supplies it simply does not need, demand is also slipping. Yesterday, the Australian government and Citi both suggested that iron ore could sink below US$40 this year, while Citi also downgraded its guidance on BHP Billiton and Rio Tinto Limited (ASX: RIO) from Buy to Hold.
While BHP Billiton would still likely be making a profit if prices fell to those levels, its margins and cash flows would come under enormous pressure. That could also force the miner to increase its debt or reduce capital expenditure in order to honour its progressive dividend policy (or alternatively, scrap its progressive dividend policy and suffer the market's wrath as a result).
Now What: Despite its status as the world's largest and most diversified miner, an investment in BHP Billiton is by no means risk free. Although it is certainly capable of weathering the commodities storm better than its high-cost rivals, its cash flows will still come under pressure while its shares could fall considerably further.
Although BHP Billiton offers a compelling, fully franked dividend, there is no certainty that it can be maintained in the long run. Luckily, there are plenty of great alternatives available.
