Why BHP Billiton Limited and Rio Tinto Limited could raise capital

It has been reported that BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), two of the world’s largest miners, could look to sell new shares on the market to raise fresh capital.

As highlighted by The Australian Financial Review, the pair, whose shares have been crushed as a result of plunging commodity prices and a slowdown in China, could sell US$21 billion (almost AU$30 billion) worth of shares. The majority would be raised by BHP to curb its reliance on debt, whilst also firming up its balance sheet to allow it to acquire assets from other distressed rivals.

Indeed, BHP and Rio Tinto have both been crushed by the recent commodities crisis, together with fears conditions will only worsen over the coming months (or maybe even years). But unlike many of their smaller rivals, they’re well equipped to weather the storm, even though their earnings results will take a hit. They maintain much lower production costs and can thus remain profitable for longer.

Other miners around the globe, on the other hand, have already been forced to close their operations for good, unable to cover their costs of production. But there are plenty that are still operating yet could look to offload some of their assets to free up additional cash.

In regards to BHP and Rio Tinto raising capital to take advantage of such opportunities, the AFR quoted analysts from Bank of America as saying: “We think there is no time like the present. Strengthening balance sheets would give flexibility if/when tier-one assets come to market.” It believes BHP could look to raise US$15.4 billion, compared to US$5.7 billion for Rio.

Of course, investors have cooled on the mining sector in recent years as the mining boom has unwound, so it’s likely there would be a limited pool of capital that investors would be willing to cough up. As such, the Bank of America analysts also suggested such a move by BHP and Rio Tinto would be bad news for others in the sector such as Fortescue Metals Group Limited (ASX: FMG), as it would make it increasingly difficult for those miners to do the same.

BHP’s shares have fallen 0.1% today, but hit a fresh decade-low of $15.95 earlier in the session, while Rio Tinto’s share price has surged a little over 2%.

Don't miss your chance to "invest like a Pro"...

Motley Fool Pro -- our most comprehensive and innovative ASX investment service -- will reopen for a brief time, to accept new members. That means you've got the chance to follow along as one top investor puts $1,000,000 of The Motley Fool's own money to work...all in ASX stocks. And you're invited to watch everything that goes into our decision -- 100% FREE! Click here to step inside for an exclusive look around - it's FREE!

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.