Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) have long been heralded as the two big diversified miners with similar prospects but, in recent years, their strategies have drifted apart.
Following the fall of aluminium and coal prices, Rio became more reliant upon its iron ore division. Its Pilbara iron ore operations saved shareholders from continued write-downs and impairments following the terrible acquisitions of both Alcan and Mozambique coal businesses from Riversdale, which they purchased for a total of $4.1 billion in 2007-2008.
As a result of falling commodity prices, Rio’s iron ore division contributes over 80% of earnings to the group and, in the near term, this looks set to continue. Uranium, coal and aluminium have been posting poor earnings thanks to continued low spot prices.
Is management running in circles?
Since early 2013, management has been hurrying to sell-off and divest non-core assets and pay down debt. However could it be Rio is making the same mistake again? Instead of buying businesses which had risen for 18 years straight, now it’s selling assets whilst they are at their lowest point.
The diamonds business, which has recorded growth when other divisions struggled, has been on the chopping block. In addition, copper businesses are being sold-off (Northparkes, Eagle, Palabora) despite continued demand and a solid long-term outlook for the operations. All-in-all shareholders should carefully scrutinise what Rio decides to sell in order to “freshen up its balance sheet.”
The decision to expand its Pilbara iron ore mines to 360 million tonnes per annum was a no-brainer for senior management. The miner will be able to increase production beyond its current rate of 266 million tonnes to its target by 2017 which, given the miner can dig up and ship the steelmaking ingredient for less than $US50 per tonne, is an exciting growth prospect.
However, investors have become concerned over a possible oversupply as big miners, including Vale SA (NYSE: VALE) and even Fortescue Metals Group Limited (ASX: FMG) ramp-up production. Rio’s key growth prospects are its recently opened Oyu Tolgoi gold and copper mine in Mongolia and huge iron ore project in guinea called Simandou.
The big Australian a safer bet
Unlike Rio, BHP has grown a more diversified commodity base and has benefitted from continued demand for petroleum, copper and iron ore. It too has decided to increase production of iron ore and recognises the potential for continued demand from Asian countries. Its West Australian Iron Ore (WAIO) projects are ramping up production to 270 million tonnes per annum at a very low capital cost.
For the half-year ended 31 December 2013, BHP notched up record production across its petroleum, copper, iron ore and coal businesses. In FY14 petroleum is on track for 250 million boe (a 6% increase), iron ore is expected to jump 10%, metallurgical coal 7% and copper is tipped to remain largely flat. Long-term growth prospects include the Jansen potash project, which is tipped to produce 8 million tonnes of saleable potash per annum with a mine life of 70 years.
In the short term, shareholders are likely to experience higher dividend payments following cuts to non-core assets and capex.
Investors looking for growth (with a higher degree of risk) could add Rio to portfolios and hope iron ore spot prices remain strong throughout 2014. Crucial to long-term shareholders is its ability to continue driving value from existing mines because, at least in the short term, it appears acquisitions or further significant investment is unlikely. Risk-averse investors should look to add BHP to their portfolio if they are comfortable holding it for a long time.