Why I’m Not Buying Cheap BHP Billiton Limited

I’ve never quite been able to figure out mining companies. While most companies that suffer a tumble in their share price can be seen as good value and contrarian buys, I have been wary of buying into the recent crash in the share prices of mining companies.

It’s true that mining shares have had an awful 12 months, with commodities such as iron ore and copper crashing in price, and mining shares falling in sync with this.

The end of the mining boom

BHP Billiton‘s (LSE: BLT) (NYSE: BBL.US) recent results seem to bear out my scepticism. Its profits are down by 31%, as it suffers the effects of the fall in commodity prices.

Although the P/E ratio of 12 looks cheap, and the dividend yield of 3.8% quite reasonable, my question is: where is the growth? I don’t have a satisfactory answer to that question.

Emerging markets, from India and China to Brazil and Russia, are clearly slowing. And their growth is now rebalancing towards a consumer boom that is gathering pace, and an increased focus on services rather than manufacturing.

While China is still the workshop of the world, more and more it is producing high-value-added products rather than the cheap and cheerful products of yesterday. Much of the infrastructure of China’s cities has already been built. All this points towards a decreasing reliance on metals and minerals.

However, I would temper this scepticism with the fact that other regions of the world, particularly the so-called frontier markets, are still growing apace. Can places such as Africa, Mexico and Vietnam take up the slack from China? Perhaps.

A nuanced picture

So, I don’t foresee a return to the boom years of mining, but I suspect there will be echoes of this original boom. I think that the demand from frontier markets will put some sort of floor under commodity prices, preventing them from crashing inexorably.

 Overall, the picture is quite subtle and nuanced. I certainly wouldn’t rule out investing in mining companies.

But, personally, I can find better prospects for growth elsewhere. For me, there is too much uncertainty clouding future earnings. Because of this, although BHP Billiton looks cheap I, for one, will not be buying.

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> Prabhat does not own shares in BHP Billiton.