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What’s Stopped Me From Buying BHP Billiton plc Today

Today, I am looking at BHP Billiton (LSE: BLT) (NYSE: BBL.US), and deciding whether to scoop up a load of the stock for my investment portfolio.

Earnings continue to drag amid market difficulties

BHP Billiton announced earlier this week that revenues toppled 8.7% in the year ending June 2013, to $65.97bn. This saw underlying earnings before interest and tax hurtle 22.4% lower to $21.13bn.

Barring its aluminium, manganese and nickel business, earnings slipped across all of its major divisions, led by severe weakness in its coal arm — here, earnings dropped by 73.3% to $746m. BHP Billiton noted the effect of heavily constrained prices in both the iron ore and metallurgical coal markets, while oversupply also harmed copper, aluminium and nickel prices.

In a bid to bolster its balance sheet, the mining leviathan said that it will keep capital expenditure down to $16.2bn in fiscal 2014 compared with $20.22bn last year. It is also planning to keep its busy divestment programme rolling to create a more streamlined operation. Still, a backdrop of difficult market conditions look likely to more than offset these measures.

Commodities still under the cosh

The mining giant followed up an 18% earnings per share (EPS) decline in the year ending June 2012, with an even worse showing for fiscal 2013 — EPS slid by 29% to 147p, falling short of analyst consensus. However, brokers anticipate a 20% bounceback in 2014, to 170p.

BHP Billiton was recently trading on a forward multiple of 11.2, providing a decent discount to a comparative figure of 14.4 for the broader mining sector and 15.7 for the FTSE 100. However, in my opinion, the company — like all mining plays — carries a huge degree of risk, which could severely hamper any earnings turnaround.

While economic newsflow in Europe and the United States has improved in recent times, fears over the state of affairs in Japan — and signs of slowdown in emerging markets worldwide, particularly commodity glutton China — continues to keep commodity prices in the doldrums.

And many of BHP Billiton’s raw materials markets are likely to suffer from increasingly worsening supply/demand fundamentals, particularly in the critical iron ore market which accounts for a third of group revenues. Indeed, the firm warned that increased supply is likely to exert downward pressure on prices” across commodity markets over the near-term.

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> Royston does not own shares in BHP Billiton.