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Can BHP Billiton plc’s Share Price Return To 2,610P?

Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.

Today I’m looking at BHP Billiton (LSE: BLT) (NYSE: BBL.US) to ascertain if its share price can return to 2,610p.

Initial catalyst

As usual, before we can establish whether or not BHP’s shares can return to 2,610p, we need to establish the initial catalyst that took them there in the first place.

It would appear that the reason lies in iron ore. In particular, while BHP is a diversified mining company, based on 2012 numbers, around 31% of the company’s revenue came from the production of iron ore. This means that one third of BHP’s sales are dependant on the price of iron ore.

Indeed, it would appear that when BHP’ shares hit their high of 2,610p back at the end of 2010, iron ore reached a record price, over $160 per ton.

Unfortunately, the price of iron ore has not returned to these previous highs and it seems that this this is putting a lid on BHP’s profitability and as a result, share price.

Having said all of that, when BHP’s shares reached 2,610p back in 2010, by my calculations, the company was trading at a historic P/E of 12.1 — not too demanding. 

But can BHP return to its former glory?

As the price of iron ore remains below its 2010 highs, BHP’s profits are likely to remain depressed. However, the company is trying to navigate around this by increasing its iron ore output, mitigating price declines. Still, as of yet this has not been enough to stem falling iron ore revenues. In addition, BHP’s revenue is coming under pressure from the falling price of other commodities such as potash, coal and copper.

Actually, in my opinion until there is more clarity about the global economic outlook, the prices of these commodities, as well as BHP’s revenue will continue to remain volatile.  That said, excluding exceptional items, such as write-downs on the value of mining projects, BHP is currently trading at a historic P/E of 10. This gives the company plenty of scope to move back above 2,000p per share.

Furthermore, BHP has repurchased $11.5 billion worth of stock since 2011, so the company should find it easier to achieve an earnings per share figure similar to that of 2010.  Nonetheless, as long as uncertainty in the resource sector persists, BHP’s future looks uncertain. 

Foolish summary

All in all, the question of whether or not BHP share price can return to 2,610p is dependent upon the price of commodities, in particular, iron ore, which remains depressed. As a result, I feel that BHP cannot return to 2,610p. 

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In the meantime, please stay tuned for my next FTSE 100 verdict.

>Rupert does not own any share mentioned in this article.