China has been pumping a lot of money in mine operations in Africa, I must see if I can find a bit about how they are going. I know Zambia for example where the Chinese have been pretty active has been hit hard because of the slump in commodities prices so maybe the operations in many African countries have quite a high cost base. (not that easy to get the stuff out of some of those land-locked countries)

Blue chips stocks do normally trade at a “quality” premium but that is why nasty corrections can be good buying opportunities as the prices for these blue chips also get hammered, and it makes them a more attractive …if you feel they will recover of course!

However the assumptions made are:
- BHP will not have much competition
- resources will be strongly in need

Based on what you have said about mine development, it looks like BHP probably won’t have a lot of short-term competition. However if someone like China decided to heavily invest in mine operations elsewhere DURING the slump, then that could give them time to get mines operating.

BHP is definitely in a good position for export diversity. It has a bit of everything. Uranium is a good one, especially if it is hard to come by elsewhere. I guess a question is, how much Uranium would BHP have to sell to maintain a decent P/E ratio, if other resource prices collapsed? You could ask that question of all of the resource types I guess, depending on the proportion of export potential for each resource. I wonder if iron ore did not have strong demand, would BHP’s share price warrant a $35 price tag, or would $15 be more realistic?
Hard questions to answer.

Personally I am not particularly interested in BHP. Blue Chips strike me as somewhat ‘arrogant’, in the sense that they may appear valuable just because of their status. I especially think that of our big four banks.

As for China and demand, of course the Chinese will play hard with prices. This happens over time with most buyer-supplier relationships. But China is not the only buyer and if demand picks up Japan may agree to a price hike and so the old price negotiations will enter a new cycle. Recently the Chinese agreed to iron ore prices first negotiated with the Japanese, Koreans and Taiwanese, so China is quite clearly not the only global price giver.

In addition when times are tough high cost mines are shut and new mine construction is put on hold..so capacity is taken out of the system. Thus we get back to the basics of supply and demand. Yes there are mines in Africa and Asia etc but are they low cost operations and how much can they reliably supply? Also BHP is highly diversified so they have more to sell than just iron ore and coal. (BHP also gives investors exposure to gold and uranium for example)

Still times are not going to be good for most miners over the next few years. The question is, will BHP come out of the current global downturn in a stronger and more dominant position?

I can think of quite a few alternatives that had 500% increases within MONTHS that I would rather have. Its all hindsight, and somewhat meaningless to point out (I could speculate some ‘what ifs’ about times in the Casino).

I think there is much more value in assessing why something changed value. If I find a share interesting I usually add it to a watch-list and monitor any news and changes over time. Sometimes I see a huge jump in price and I try and figure out why, and what prior indicators were there? Understanding the changes in value is ultimately of much more assistance than regret.

Personally I have been trying to temper the emotion of ‘greed’ as much as I can since I started trading. I get better at it every day, but I know it will never completely go away. I see the influence of greed everywhere I look…

Now I wouldn’t even consider picking any up at more than $20 a share. I think there is even potential for them to get back to $15.

They have pretty slim dividends, so if you want them for dividends then you need to really expect much greater earnings, and therefore share-price(capital) appreciation, for the future.

BHP is in a reasonably good position, having very little debt at the moment, unlike Rio Tinto. They are the heavyweights around these parts, so you know your capital would never be reduced to zero, but there is potential to go to less than 50% of the current price.

Without getting into the topic of ‘Chinese demand’, I will touch on the topic of ‘Chinese respect’. Both BHP and Rio have not been playing nicely with China. Perhaps they know something we don’t. However, if the Chinese Gov. decided to ban any purchases from Rio or BHP, that would virtually ruin those companies. It’s an unlikely event, but here we have a situation whereby BHP and Rio are completely RELYING on China to support their sales, yet they are not playing nicely with China in return. I’m no market strategist, but I don’t see that as particularly wise when there are other resource alternatives such as Brazil, Africa and Tibet (Tibet has rumoured high potential).

Therefore I see more risk in the bluechips BHP and Rio than many others appear to. Obviously the accuracy of these assessments will only be shown in time. One consideration that should be made is ‘what are the assumptions we make about BHP?’. And which of those could be the undoing of an investment strategy?