Which is the better mega-miner – Rio Tinto Limited or BHP Billiton Limited?

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Despite the volatility and nervousness surrounding the mining sector over the past 18 months or so, a significant number of Australian shareholders still have exposure to Australia’s biggest miners.

For every seller there’s a buyer, and there’s a person or entity behind every last one of Rio Tinto Limited‘s (ASX: RIO) and BHP Billiton Limited‘s (ASX:BHP) combined 3.6 billion shares on issue.

Which of these shareholders is the shrewdest?  Here’s a quick look at each company’s financial position – all figures are taken from the most recent report to 31 December 2015.

Rio Tinto Limited (ASX: RIO)

Iron ore – 73% of segment earnings in full-year 2015, cash cost of US$14.9 per tonne at Pilbara mines, the company’s largest. Gross iron ore revenue of US$15,305m divided by 270.9m tonnes of ore shipped suggests an average realised price of US$56.50 per tonne.

Bauxite, Alumina, Aluminium – 21% of segment earnings in full-year 2015, average realised aluminium price of US$2,058/tonne.

Diamonds, coal, copper, titanium, uranium, other operations – 6% of segment earnings in full-year 2015.

Rio had $23 billion in debt, $9.4bn in cash, and $3bn worth of inventory. During the 12 months to 31 December 2015, Rio had an operating cash inflow of $9.4bn, but a total cash outflow of $3bn, due to $4.6bn in asset purchases, $4bn in dividends, $3.5bn in debt repayments, and $2bn in share buybacks.

BHP Billiton Limited (ASX: BHP)

Iron ore – 34% of revenue, but 38% of segment earnings at the Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) level. Cash costs of US$15.21 per tonne in Western Australia mines, the company’s largest. Average realised price of US$43/tonne in the six months to 31 December 2015.

Copper – 23% of revenue, and 22% of Group EBITDA. Cash costs of US$1.45 per pound at Escondida mine. Average realised price of US$2.12 per pound.

Coal – 13% of revenue, but 4% of EBITDA. Average cost of US$59 per tonne, average realised price of US$82/tonne, US$67/tonne, US$49/ tonne for hard coking coal, weak coking coal, and thermal coal respectively.

Petroleum – 28% of revenue, but 37% of EBITDA. Average realised price of US$42/barrel for oil, US$2.35/mscf for US natural gas, and US$8.24/mscf for LNG.

BHP has US$36 billion in debt, US$10bn in cash, and $3.9bn in inventory. Unlike Rio, the company had a net cash inflow of $4bn, primarily due to operating cash flow of $5.2bn, borrowings of $7bn, asset purchases of $4bn, debt repayments of $1bn, and dividends of $3.2bn.

Foolish takeaway

This is a simple comparison, but there are a few things to take away nonetheless. Although BHP is far more diversified than Rio Tinto, Rio delivered 50% more in cash from operations than BHP in the most recent period. While Rio’s current expenditure is unsustainable without higher debt or lower asset purchases and a weaker dividend, better cash flow gives the company more flexibility – or at least appears to.

However, BHP has significant exposure to a wider range of commodities, and this gives the company more options in allocating its capital. It also gives the company a better chance of bouncing back as the outlook for iron ore continues to look poor. For these reasons, if I had to buy a miner, my preference would lean towards BHP.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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.

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