Is the worst over for the BHP Billiton Limited share price?

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has put on a spectacular show today, lifting 93 points or 1.9% and climbing back above the 5000-point mark. Considering its recent history, it might come as something of a surprise that BHP Billiton Limited (ASX: BHP) is one of the companies leading the climb.

BHP Billiton has been one of the worst performing shares on the ASX in 2015. As of yesterday’s closing price, the share price had fallen nearly 41% year-to-date and was hovering near its lowest level in more than 10 years.

As for what caused the miner’s demise, there are plenty of reasons to choose from. To begin with, there has been a severe drop in iron ore and oil prices which have acted as a huge drag on earnings, a slowdown in China and the recent disaster in Brazil that tragically left more than a dozen people dead. Speculation that the miner would be forced to cut its progressive dividend yield has also likely weighed into the market’s sentiment behind the miner’s shares.

However, BHP Billiton’s share price is once again above $17 after lifting an impressive 4.6% so far in today’s session. That not only compares favourably to the market’s jump, but also to rivals Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) which have risen 2.4% and 2.1%, respectively.

While investors will no doubt have been encouraged by a 2.5% lift in the oil price and a 0.8% lift in the iron ore price overnight, others may also be weighing in on whether BHP’s shares have bottomed out.

As highlighted above, BHP Billiton’s share price hasn’t sunk this low in more than a decade and it is offering a monstrous 9.9% fully franked dividend yield at its current price (or 14.2% when grossed up for franking credits). Whether or not the miner can sustain or improve that payout is still a matter of debate, but as some analysts have pointed out to The Australian Financial Review in the recent past, it’s a ‘once in a lifetime’ dividend yield for a company of BHP’s stature.

Source: ASX website; 10-year price chart for BHP Billiton shares

Source: ASX website; 10-year price chart for BHP Billiton shares

A ‘Red Hot Buy’

In The Australian Financial Review yesterday, markets columnist Phillip Baker also commented that BHP Billiton’s shares could be experiencing ‘capitulation’ right now.

As defined by Investopedia, capitulation occurs: “When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling” (emphasis my own).

Indeed, it is possible when it comes to BHP Billiton and Mr Baker isn’t the first to go on record as saying BHP Billiton could now be a buy. Veteran mining reporter Trevor Sykes recently told the AFR the shares were a “red hot buy”, suggesting they had become heavily oversold.

It’s worth noting that both of these reporters could well be correct. Following its heavy sell-off this year, hindsight could well show us that now was the perfect opportunity to buy – especially if the miner does maintain its progressive dividend policy.

On the other hand, there are still risks to buying the shares which could see them fall even further still. For instance, if the progressive dividend policy does fall through (as many analysts think it will, possibly in the next two years), that could impact overall shareholder returns and thus, the share price.

There’s also the risk that commodity prices will continue to fall. The world’s four biggest producers, being BHP, Rio Tinto, Fortescue and Brazil’s Vale, are all decreasing their costs of iron ore production which could see even more tonnes added to the market.

Iron ore is currently trading for US$39.36 a tonne, according to data from The Metal Bulletin, having rebounded over the last two days. But that’s not enough to say the commodity has bottomed out, or that the worst is finally over.

Oil is the same. The Organisation for Petroleum Exporting Countries recently ignored the market’s pleas to lower its production ceiling which is putting further pricing pressure on the resource, and could drag it even lower, over time.

The point is, BHP Billiton shares could prove to be a solid investment right now, but there are still risks associated with buying its shares today.

Foolish takeaway

Successful investing is as much (if not more so) about avoiding losses as it is finding the big winners. BHP Billiton, together with most companies across the resources sector, are still facing strong industry headwinds and slower growth prospects which could continue to impact their share price performances. Although BHP Billiton might prove to be a great buy at today’s prices, it’s a risk that I’m not yet willing to take for my own personal portfolio.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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