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3 reasons why BHP Billiton Limited is a better bet than Rio Tinto Limited

If you needed another reason to avoid Australia’s largest iron ore miner, Rio Tinto Limited (ASX: RIO), here it is. And I’ll throw in two bonus reasons.

Having spent around US$4 billion (A$3.8bn) acquiring Riversdale Mining in 2011, Rio has taken a massive loss, selling its Mozambique coal project for just US$50 million. At the time, Doug Ritchie, chief executive of Rio’s energy division said, “This is a great outcome for Rio Tinto.”

Little did he know that in just over two years, it would lead to him losing his job, and Rio writing down the value of the Riversdale assets by US$3 billion (A$2.8 bn). Rio said getting the coking coal to port was more challenging than expected, and reserves and resources would be downgraded. Chief executive Tom Albanese also quit.

It didn’t help that Rio had been forced to write down the value of its US$38 billion purchase of Canadian aluminium producer Alcan by US$27 billion since 2007.

You could pin the blame for those on the previous CEO Albanese, and it’s probably a smart move by current Rio chief Sam Walsh, given the difficulties facing the coal project, not least the falling coal price.

But it makes Rio even more heavily exposed to a single commodity – iron ore. By comparison BHP Billiton Limited (ASX: BHP) has a much more diversified asset base, including petroleum, nickel, copper, aluminium, manganese, coal, uranium and potash. Iron ore contributes around half of BHP’s earnings, compared to 90% (and rising) of Rio’s profits coming from the commodity. If you believe the iron ore price won’t fall dramatically, Fortescue Metals Group Limited (ASX: FMG), which is currently trading on a prospective P/E ratio of 5.2x, compared to Rio’s 13x, is a much cheaper option.

2 bonus reasons

Add in a widely expected $3 billion share buyback and a fully franked 3.3% dividend yield, and BHP is your answer if you want a solid, blue chip resources company offering potential growth and income.

However, if you want something even better than BHP and Rio, with a good track record for growth, we have an idea for you. It's a small-cap ASX stock offering a 7% grossed-up dividend yield with a cheap share price and excellent growth prospects which I'd buy before Rio Tinto and BHP! This 'ultra-promising' stock was recently identified by our top analyst who dubbed it, "The Motley Fool's Top Dividend Stock For 2014 - 2015". BEST of all: You can get its name and stock code FREE in our investment report! Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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