Why Rio Tinto Limited’s earnings may impact upon BHP Billiton Limited

Rio Tinto Limited (ASX: RIO) will be reporting its half-yearly results after the close of trade today. This will have significant implications for fellow mining heavyweight BHP Billiton Limited (ASX: BHP).

Impact on Earnings?

Any outlook statements for the iron ore industry will be closely scrutinised by market participants as iron ore is the largest earnings driver for both companies. It accounts for around 70% of EBITDA for Rio Tinto and approximately 40% for BHP.

Impact on capital management initiatives?

The market has been anticipating increased dividends, special dividends or share buybacks. The catalysts should be market commentary by Rio Tinto which may also set the tone for BHP as to whether capital management initiatives may be implemented. Some of these catalysts are as follows:

Negative Catalysts

Ongoing strength in the Aussie dollar.

Lower iron ore prices, which are currently at US$95.90 a tonne.

Positive Catalysts

Positive commentary on commodity markets in general.

Increasing volume of exports which will lower unit costs. After recently achieving the fourteenth consecutive annual production record, BHP has upped the ante by increasing iron ore production by about 50% over the past three years.

Disposal of assets – More applicable for BHP where several divisions, including nickel and coal, have been loss-making in recent years.

Increasing confidence that net debt can be held in check.

Now What:

In the current environment the major miners are trying to garner shareholder support by offering higher yields. This is shown by examining the five-year dividend averages for Rio Tinto (1.9%) and BHP (2.95%). The current yields are above average at both 3.2% and 3.36% respectively. From a five-year average of 1.18%, Fortescue Metals Group Limited (ASX: FMG) is showing a significant increase to currently yield 4.26%.

In my opinion, as long as new acquisitions aren’t made, increasing export volumes on existing projects will reveal lower unit costs and allow some form of capital management. This should provide additional support to the current share price of Rio Tinto. This should in turn provide a positive tailwind leading up to the full-year BHP results due on August 19.

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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