Kick Off: BHP Billiton Limited vs Fortescue Metals Group Limited

Two of Australia’s largest miners go head-to-head with both companies still capable of advancing in this competition

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In their third match of the Motley Fool’s ASX World Cup, Australia’s largest iron ore miner BHP Billiton Limited (ASX: BHP) will take on its smaller counterpart Fortescue Metals Group Limited (ASX: FMG).

Given BHP Billiton’s sheer size and diversity, it will surely go into today’s match as a crowd-favourite – particularly after its dominant displays against Rio Tinto Limited (ASX: RIO) and gold miner Newcrest Mining Limited (ASX: NCM).

Here’s how the pair line up

BHP Billiton Fortescue Metals Group
Recent Price $35.95 $4.22
Market Capitalisation $115.5 billion $13.1 billion
Forecast Dividend Yield 3.6% 5.7%
Projected P/E ratio 12.5 3.7
Price-book ratio 2.51 2.31

BHP Billiton

As can be seen in the table above, BHP is a much larger company than Fortescue and commands a much higher premium. In fact, at their current price, investors are willing to pay more than three times the amount for BHP’s future earnings as they are for Fortescue’s. However, there is a good reason for that…

BHP Billiton maintains heavily diversified operations, focusing on iron ore, copper, coal and petroleum, as well as potash. It is this diversification that spreads the risk along the company’s backline with less pressure on any one division.

It is also the company’s exposure to the coal and potash markets that make it an exciting prospect over the long term. Demand for both resources is expected to soar over the coming decades as the global population rapidly expands and developing economies continue to rise. Its generous 3.6% fully franked dividend yield makes this team even more appealing.

Fortescue Metals Group

Unfortunately, this team lacks the diversification that makes BHP Billiton such a strong team, relying almost solely on iron ore for its revenue. While this strategy proves advantageous for Fortescue when the iron ore price is soaring, it is left heavily exposed when the commodity’s price drops, which it has done over the course of 2014. This poor defensive structure allowed two of BHP Billiton’s shots at goal to sneak past the goalie.

Despite its low P/E ratio and high dividend yield, Fortescue’s enormous debt load is enough to turn fans away. As of December 2013, the company had a net debt of $8.7 billion and, as its margins come under pressure, so will its ability to repay its debt. In comparison, BHP Billiton is comfortably paying down its debt as it rapidly reduces its operating costs. That’s another goal for BHP!

Full Time

Although fans might have been fooled by Fortescue’s low P/E ratio and high yield early in the game, BHP’s defensive structure and future prospects saw it win convincingly, scoring 3-0.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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