Why BHP Billiton Limited Stock Rose 21% in April

BHP Billiton benefited from an iron ore rally, but there's danger in the wings.

Reuben Gregg Brewer
Reuben Gregg Brewer
May 9, 2016 at 9:29AM
Energy, Materials, and Utilities

Image source: BHP Billiton.

What: BHP Billiton Ltd. (NYSE:BHP) shares rose just over 20% last month. Between mid-January and the end of April, BHP's shares advanced a heady 55% or so. The story is the same for both periods, with a little Brazilian drama thrown in for good (perhaps bad) luck.

So What: There's two stories behind BHP's advance last month and its move over the longer period. The big picture is that commodity prices started to move higher in the middle of January. As one of the world's largest miners, with a focus on iron ore, copper, metallurgical coal, and oil, BHP has benefited as investors start to look more favorably on the sector. The uptrend continued in April, with particular strength on the iron-ore side of things. That's worth noting because iron ore accounts for roughly a third of the miner's revenue and about 45% of its underlying EBITDA.

But there's another issue that's worth bringing up, and that's Brazil:  specifically the Samarco disaster. A waste containment dam at this mine, half owned with Brazilian corporation Vale SA (NYSE:VALE), ruptured and destroyed surrounding towns, killing several people. Both companies came to terms on a cleanup plan with the Brazilian government in March, which sent the shares of each notably higher and appeared to lift investor concerns about the topic. And yet this issue is hardly over, which became painfully clear in the early days of this month, when Vale and BHP got hit with another lawsuit over Samarco. Their shares, as you would expect, tanked on the news.

Now What: Looking at the fundamentals of BHP's business reveals a well-situated global mining powerhouse. And with strengthening commodity markets, you might be tempted to jump aboard. However, both BHP and Vale have other things floating around that you have to take into consideration -- most notably Samarco liabilities. If you are interested in BHP, make sure you understand all of the bigger-picture issues it's facing right now, or you could find yourself on a stressful roller-coaster ride.