If the market price of the widgets you are selling falls significantly in price, it’s going to affect your bottom line.
Over the past few years, BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) have been staring down the barrel of falling prices for iron ore, oil and copper — a cross-section of their core product offerings.
Both stocks face the threat of further price falls, but one of these stocks has a secret weapon that might entice some of you more longer-term investors. Read on for more.
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An awkward spot to be in
Iron ore accounts for around 90% of Rio’s earnings. Citigroup has forecast that the commodity may fall further, to less than $60 per tonne this year. It’s the usual story — global supply looks set to increase further, while demand remains weak. The price forecast is a far cry from last year’s average price of $96.97 per tonne.
In addition, the Australian dollar — which to some degree tracks commodities prices — has fallen from around 94 US cents from a year or so ago, to just 81 cents today. One South American-based analyst says it could fall further to under 60 cents. It’s indicative of how a growing number of commentators view the medium-term outlook for China’s economy, and hence commodities prices. No one expects China’s economy to stall, but some have forecast for the country to slow down to 5%-6% growth. That all means commodities prices have further to fall.
This Fool doesn’t see Rio Tinto’s share price recovering materially — excuse the pun — for some time. For longer-term investors, keep a close eye out for the dividend. The dividend payout appeared to follow the global mining boom up the mountain, so I suspect it may trail it on the way down, too.
BHP’s strength is in its scope
BHP Billiton’s strength is in its scope and diversity. It produces iron ore, copper, coal and petroleum. It’s all designed to “hedge” the company from a downturn. BHP shares, though, have taken a hammering in the past five weeks, falling 13% since the start of December. In fact, the stock has dived close to 29% since August.
Much of the selling pressure comes from a double-hit of sorts. There are new concerns over the growth prospects for both copper and iron ore. Copper currently accounts for about 20% of the miner’s earnings before interest and tax, and the record shows that the price ended at a new 4½-year low earlier in the week. Chicago-based firm, Archer Financial Services, told The Wall Street Journal that it doesn’t see an upside for copper coming any time soon.
“Lower growth figures across the world don’t really paint a bullish picture for copper.”
Analysts say some of the latest pessimism on copper (and iron ore) has been exacerbated by the weak manufacturing data we received from China and the US last week.
Yes, BHP Billiton’s stock price has taken a metaphorical beating over the past six months (and for good reason), but this is a truly resilient company. In the long-term scheme of things, it’s just coming off its highs. The metrics of the stock itself are hard to fault. It has a return on equity of nearly 15%, a return on capital of over 20%, a dividend yield of close to 6% (covered 2.5 times) and a price-to-earnings ratio of under 10.
One way or another
BHP Billiton is bigger and more diversified than Rio Tinto, so it’s ‘always’ going to be a ‘safer’ stock pick. So as you read the negative headlines around China and the prices of commodities, know that over the longer term even the pros are still holding onto the world’s biggest miner.
