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Why I’m Finally Tempted To Buy BHP Billiton plc & Rio Tinto plc Again

I sold my stake in mining giant BHP Billiton (LSE: BLT) (NYSE: BBL.US) last year over fears of what the forthcoming Chinese hard or soft landing would do to its share price.

With the stock down 33% in the last 12 months, I haven’t regretted my decision. China has slowed, and demand for copper, iron and other metals has fallen accordingly, forcing down prices. 

I got that right but one thing I didn’t anticipate was the fall in the oil price: many investors forget that BHP Billiton also positions itself as “a global leader in oil and gas exploration, production, development and marketing”.

So it took a double hit.

In A Hole

At the same time, I removed mining rival Rio Tinto (LSE: RIO) (NYSE: RIO.US) from my wish list — and again, I have no regrets. Its share price is down 21% in the last 12 months, again, largely due to macro problems such as falling global (Chinese) demand.

In both cases, I had mixed feelings about a decision both companies had taken to ramp up supply in the teeth of falling demand. The aim was to drive out smaller, high-cost competitors with tighter margins, in the hope of ruling the roost once the cycle turned again.

Plus, of course, more production = more sales = more revenues. This has partially offset some of the headwinds of lower prices, as have cost control measures. BHP Billiton has since pulled back on that policy in the teeth of the global iron ore glut, however, confirming my initial misgivings. 

Potash-tic?

I don’t expect the commodity cycle to swing back in favour of the big mining giants in the immediate future, even though China has survived its recent stock market scare, and its latest GDP growth figures surprised on the upside at 7% a year.

Yet I still think BLT and RIO are starting to look like a tempting contrarian buy for long-term investors, trading at just 7.66 and 8.02 times earnings respectively. Income-hungry investors will also be tempted, because these traditional growth stocks now yield an astonishing 5.91% and 5.21% a year, more than 10 times base rate.

Many investors question whether these dividends are sustainable given today’s commodity prices, despite management assurances. If the dividends are cut, the company share prices will also take a hit, which is my biggest concern.

I may be tempted to buy BHP Billiton and Rio Tinto again, but I’m not quite convinced.

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Harvey Jones 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.