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This broker thinks BHP Billiton Limited shares are worth $21.50

Credit: Lucas Walters

Shares of mining heavyweight BHP Billiton Limited (ASX: BHP) have risen another 2.1% today, adding to yesterday’s 2% gain after Credit Suisse provided a rather upbeat target price.

According to the Dow Jones Newswires, the investment bank thinks BHP’s shares will rise to $21.50. Assuming it reaches that target price, that would represent their highest price since November 2015 (before they fell to a low of just $14.06) and a gain of 13.5% from their current price of $18.95.

By comparison, Goldman Sachs recently raised its price target by 2.9% to $18, while Deutsche Bank has a $19 target on BHP Billiton shares. Based on those figures, one could argue that BHP’s shares are either fairly priced or overpriced.

The problem with trying to put a value on a mining business is that the miner itself is completely at the mercy of commodity prices. While BHP does have the ability to continue extracting unnecessary costs from its operations, lower commodity prices will still have a negative impact on margins and overall earnings.

Notably, iron ore and oil prices have regained some composure in recent months, and some investors believe they may have finally found a floor. But iron ore in particular has shown pockets of weakness again, highlighted by its sharp decline recently. Most analysts expect further falls in the second half of the year.

If those falls do ensue, BHP’s shares may struggle to hit Credit Suisse’s target, and may even struggle to maintain their current price tag. Of course, there may come a time where BHP’s shares become too cheap to ignore, but right now, the potential headwinds seem too great.

Besides, there are plenty of other great blue-chip businesses whose shares are trading at very reasonable prices now, without that element of commodities risk. Discover The Motley Fool's top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the very real prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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