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Is It Time To Dump BHP Billiton plc, Tullow Oil PLC And Randgold Resources Limited?

Today I ‘m looking at the profits potential of three battered commodity giants.

Diversified digger on the defensive

In usual circumstances it could be argued that businesses opearting across multiple markets, like BHP Billiton (LSE: BLT), offer supreme security. That’s because unlike dedicated commodity producers, diversification protects earnings from over-reliance on one or two key segments.

But this can hardly be considered a strength at the current time as all of BHP Billiton’s markets keep on collapsing. Iron ore prices – a sector from which the London firm derives almost 60% of its earnings – dropped to their lowest for a decade this week falling below $38.50 per tonne, according to Goldman Sachs data.

Despite the steady decline in commodity prices, major producers the world over remain hellbent on digging more and more material out of the ground to build market share. Indeed, BHP Billiton’s iron ore production of 61,000 tonnes between July and September represented a 7% rise from the corresponding 2014 quarter.

The same worrying trend is being seen across the copper and energy markets too. These are BHP Billiton’s second and third largest sectors, respectively, and prices of these commodities have struck multi-year lows recently too. I don’t expect earnings at the London firm to stage a meaningful recovery any time soon.

Oil driller poised to plunge

The growth outlook at fossil fuel specialist Tullow Oil (LSE: TLW) received a fresh bodyblow this week when Brent prices finally gave up the fight and sank below the psychologically-critical $40 per barrel marker.

Commodities of all classes have been struck by fresh waves of bearish data from China – the latest trade data showed exports slumping 3.7% on a yuan-denominated basis during November. And expectations of more disappointing numbers in the coming months, combined with worrying production signals from OPEC, the US and Russia, threaten to push prices further south.

Such a scenario would naturally prove disastrous for Tullow Oil, especially as its capital-heavy development of its Africa assets drove net debt to a mind-blowing $4.2bn as of last month. As crude continues to sink, the London firm’s situation is becoming ever-more precarious as we head into 2016.

Fool’s gold

While gold prices have remained more stable compared to those of most commodities, I believe the earnings outlook at Randgold Resources (LSE: RRS) is also on shaky ground.

Multiple factors are working against it. First there’s an environment of low global inflation, exacerbated by a collapsing crude price. Then there’s the effect of a steadily-strengthening US dollar. And weak physical demand from the key Chinese and Indian markets also looks certain to keep the lid on gold prices looking into next year. Indeed, the yellow metal tipped to its cheapest since 2009 last week, at $1,050 per ounce.

Randgold Resources saw gold sales declining 9.6% year-on-year in the July-to-September quarter to hit £340.7m. And while the company remains debt-free at the present time, in my opinion the likelihood of low metal prices in 2016 and potentially beyond casts a long shadow over its investment appeal.

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