BHP Billiton Limited (ASX: BHP) led the ASX higher yesterday, as bargain hunters stepped in after shares in the company hit a level not seen since the depths of the GFC. From a multi year low of $24.94, shares rebounded to close at $25.52.
BHP shares have fallen 25% from the high reached on 2 March as investors have responded to a 20% drop in the iron ore price and significant falls to other key BHP commodities including oil and copper.
BHP is now trading on an earnings multiple of 13.5 times forecast 2015 earnings. Although analysts across the board have slapped a sell rating on the stock, much of the bad news has now been priced into the share price. As smaller miners succumb to the pressures that the low price has placed upon them, BHP expects its iron ore cost to reduce to just US$16 per tonne in the 2016 financial year. This allows for a healthy profit margin as BHP boosts production by 7% this year. The spin off of South32 Ltd (ASX: S32) allows BHP to focus on its core assets which remain profitable despite the commodity price falls.
Although BHP will report a lower 2015 profit in US dollars, the significant fall in the Aussie dollar means that the result will not be as bad for Australian investors. The Australian cost base against the USD denominated revenue will also be a positive for BHP in the coming year.
However it will not all be smooth sailing for BHP, with many analysts forecasting still lower iron ore prices as China's growth tempers off resulting in reduced demand for steel. This means that an investment in BHP is still one for the brave hearted. I believe that there are better opportunities on the ASX, particularly for those looking for dividend income.
