The ASX mining shares BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) are two of the biggest iron ore miners in the world. They both have their positives, although the sector is facing challenges at the moment.
The iron ore price dropped from above US$140 per tonne at the start of 2024 to around US$100 per tonne now.
Considering that the iron ore division normally accounts for a large part of each business's annual profit, it's important to consider what's happening in this space first.
Iron ore
According to reporting by Trading Economics, recent Chinese data showed that manufacturing activity contracted at a slightly faster pace in July, while services sector growth slowed to an eight-month low.
Aside from issues and weaknesses related to the construction sector in China, Trading Economics also noted a "looming implementation of new steel rebar standards in China that could trigger an inventory selloff." Increased supply from Australia and Brazil also isn't helping the supply-demand dynamic.
However, on the positive side, China's leaders pledged to step up support measures and stabilize market confidence at a Politburo meeting last week. That meeting "stressed the need to boost consumption to realize growth targets, a shift from previous focus on infrastructure projects", according to Trading Economics.
Both BHP shares and Rio Tinto shares are heavily influenced by their Australian iron ore operations.
But, for me, Simandou is the big difference between the two businesses.
Rio Tinto owns a stake in the Simandou project, reportedly Africa's largest mining and related infrastructure project. It supposedly has the world's largest untapped reserve of high-grade iron ore. This could enable Rio Tinto to diversify where its iron ore comes from.
Copper, potash and lithium
Copper is seen as one of the most important commodities for the global economy, particularly when it comes to decarbonisation and electrification. It's an essential resource for the electricity grid, electric vehicles, renewable energy generation and so on.
Both BHP and Rio Tinto already have significant copper assets. For example, Rio Tinto has a significant stake in Oyu Tolgoi, Mongolia, one of the largest copper projects in the world.
The latest move by BHP has been to acquire a copper mining project and form a joint venture for mining in a South America copper mining district.
I like the moves by both companies to expand into other commodities involved in decarbonisation, though a decline in commodity prices means those projects are less compelling than they seemed a few years ago. BHP is working on a potash project in Canada called Jansen, and Rio Tinto has a lithium project called Rincon in Argentina.
Valuation metrics
According to UBS projections, in FY25, Rio Tinto shareholders may see their company generate US$11.8 billion of net profit after tax (NPAT) and pay a dividend per share of US$4.37. These numbers mean the Rio Tinto share price is valued at 10.7x FY25's estimated earnings with a possible grossed-up dividend yield of 8.1%.
Turning to BHP, UBS predicts that for FY25, the business could generate a net profit of US$12.7 billion and pay an annual dividend per share of US$1.51. At the current BHP share price, it's valued at 10.9x FY25's estimated earnings with a possible grossed-up dividend yield of 7.9%.
Rio Tinto shares are more appealing to me – not only are they slightly cheaper with a slightly bigger potential yield, but they also have the prospect of the large Simandou project coming online in the future.
