Back above $20: Are BHP Billiton Limited shares a bargain?

Credit: Lucas Walters

Shares across the resources sector are surging higher today, including BHP Billiton Limited (ASX: BHP) whose shares have gained more than 4% to trade at $20.06.

Others in the sector, including Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), have also risen 7.8% and 2.4%, respectively. Junior miners BC Iron Limited (ASX: BCI) and Mount Gibson Iron Limited (ASX: MGX) have gained 7.1% and 6%, respectively.

BHP’s gains appear to have stemmed from an overnight lift in commodity prices, with a particular focus on iron ore and oil. Iron ore rose 2.2% to US$58.08 a tonne, according to The Metal Bulletin, while the Brent oil price managed a minor rebound to nearly US$45 a barrel.

It’s likely that an update from Fortescue Metals Group this morning is also helping to boost shares in the iron ore sector. The miner expects to ship between 165 million and 170 million tonnes in the 2017 financial year (FY17), compared to 169.4 million tonnes in FY16, while it will also continue to reduce production costs. In fact, it could even challenge Rio Tinto as the lowest cost producer.

I got it wrong on BHP…

It wasn’t long ago that BHP’s shares were fetching a little over $14. At the time, some analysts even indicated the shares could be worth as little as $6.30. But instead, they’ve gained $6 a share, representing growth of nearly 43% and making it one of the top performing shares from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

With that in mind, it’s likely that some investors will be tempted to buy the shares today. After all, missing out on an incredible performance like that can be even more painful than recognising a hefty loss, so some will want to rectify that — regardless of whether or not they’re late to the party.

A lot of investors – myself included – got it wrong on BHP earlier in the year. But while we can stew on those missed opportunities, it’s also important to recognise situations for what they were.

BHP Billiton was facing a myriad of headwinds at the time, ranging from plummeting commodity prices to fears of a major slowdown in Chinese – and global – economic growth. Arguably, the shares could easily have slipped lower than they did, perhaps pushing towards that extremely bearish price of $6.30 had commodity prices fallen further.

Thankfully for investors, that didn’t happen. Iron ore and oil have both rebounded nicely, earning those investors who held on for the ride some very notable gains in the process.

But while it might seem as though the headwinds facing BHP have disappeared, I believe they still exist. Indeed, there is absolutely no certainty that current iron ore prices can be sustained, while there is every chance oil prices could slip below US$40 a barrel again before the end of the year.

To be clear, for the sake of BHP’s shareholders, I hope that doesn’t happen, but it remains a key risk. While hindsight shows it was a risk worth taking when the shares were fetching $14 each, I don’t think the risk vs. reward trade-off is attractive enough today to warrant a purchase of the shares.

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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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