How Much Further Can Shares In BHP Billiton plc, Rio Tinto plc & Velocys plc Fall?

Should you buy BHP Billiton plc (LON:BLT), Rio Tinto plc (LON:RIO) & Velocys plc (LON:VLS)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

2015 has been a tough year for the commodities, as low demand and oversupply have pushed down the prices of most companies in the sector. What’s worse, there seems to be a growing consensus that prices will likely remain lower for longer.

Signs are abound that commodity prices are unlikely to make a rapid recovery. Slowing emerging-market growth, increasing global production of raw materials and a stronger US dollar all point towards further downward pressure on commodity prices.

BHP Billiton (LSE: BLT) has seen the value of its shares fall 44% since the start of 2015, as underlying earnings decreased by 52% in the year. But BHP has taken advantage of its low-cost production base to reduce the impact of lower commodity prices on profits by expanding production.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

During the year, petroleum output rose 4%, iron ore production climbed by 14%, whilst copper production was broadly flat. In addition, the company has exceeded analysts’ expectations in cutting costs, which will lessen the impact of declining commodity prices.

Free cash flow generation has been comparatively resilient, having fallen just 26%. And this has meant that BHP has, so far, been able to maintain its progressive dividend policy. It raised its final dividend by 2% to $1.24 per share.

However, BHP’s dividend yield of 10.5% indicates that the market is not confident that its dividend is sustainable for much longer. The outlook for lower commodity prices means BHP is unlikely to match its cash flow needs for capital investment and ongoing dividend payments with incoming operating cash flow.

With earnings set to fall another 58% in 2015/6, its valuations are not cheap either. Although shares trade at a P/E of 9.9, its forward P/E is 24.0.

Rio Tinto‘s (LSE: RIO) dividend is in better shape, as it has a much lower level of indebtedness. Rio’s net debt to adjusted EBITDA ratio is just 0.64x, compared to BHP’s figure of 1.11. Rio’s profitability has also been less hard hit by the slump in commodity prices this year.

But one major drawback of investing in Rio is its much larger reliance on iron ore, which accounts for more than 85% of its underlying earnings. Its overexposure to a single commodity means Rio is more vulnerable to changes in iron ore prices. However, these risks should be offset by its more attractive valuations.

Rio Tinto is expected to see its earnings fall by 48% in 2015, but this still leaves Rio trading at a reasonable forward P/E of 12.1. Rio’s forward dividend yield of 7.1% may not seem as attractive as BHP’s, but it does seem more secure.

In conclusion, shares in BHP and Rio could fall quite a bit further if commodity prices continue to weaken. But, as BHP and Rio are low-cost producers and both have relatively strong balance sheets, further declines in prices would force their less competitive rivals out of the market, lending some support to future prices. And this should mean these two mining giants don’t have too much further to fall.

Unfortunately, the same could not be said for the gas-to-liquids (GTL) energy company, Velocys (LSE: VLS). Velocys, which is using GTL technology to convert relatively more abundant gas hydrocarbons into their more expensive liquid forms, has seen lower oil prices undermine its investment case for converting shale gas into petroleum products.

But Velocys is already adapting to changing business conditions. Many opportunities exist to produce high-value speciality products, such as waxes and lubricants, even with lower fuel prices. In addition, GTL technology can take advantage of low-cost feedstocks, including waste and landfill gases, which have no current use, as they have until now been uneconomic to process.

Shares in Velocys are very volatile, but if its technologies are found to be commercially viable then the potential rewards of investing are enormous, too.

British CEO gobbles up £238,000 of own stock

What company does he run?

And why is he so confident in its long-term potential?

This new report - ‘One Top Growth Stock from The Motley Fool’ - reveals the full details, both risks and opportunities. Some of which you may find frankly, unbelievable.

Though past performance does not guarantee future results, over the past 5 years, it’s seen consistent:

  • Double-digit revenue growth
  • Returns on capital almost 600% the UK average
  • Now, profits are exploding again - up 46% in 1 year!

It’s no wonder insiders are buying this stock hand over fist. Last year, they bought a total £492,000 of shares. And now might be the ideal moment to join them.

So please, don’t miss this report, ‘One Top Growth Stock from The Motley Fool’ Including both risks and opportunities.

Secure your FREE copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

5 stocks for trying to build wealth after 50

Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

See the 5 stocks

More on Investing Articles

Close-up of British bank notes
Investing Articles

£20,000 in savings? Here’s how it could be used to target a £913 second income each month

Christopher Ruane walks through some practicalities of how an idle £20k could be the foundation for a sizeable long-term second…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

5 steps to building monthly passive income with a spare £10k

Christopher explains how an investor could aim to use some spare cash to start building regular passive income streams through…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »