BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO) shares are two of the biggest and most closely watched companies on the ASX. But which mining giant is more attractive right now?
According to a broker note out of Macquarie Group Ltd (ASX: MQG), the investment bank has a clear preference — and it's BHP.
Macquarie backs BHP shares over Rio
The note reveals that Macquarie has reaffirmed its outperform rating on BHP shares with a price target of $42.00.
Based on its current share price of $34.20, this implies potential upside of 23% for investors over the next 12 months.
In contrast, the broker has a neutral rating on Rio Tinto shares, with a price target of $116.00. This is just slightly above its current share price of $110.59.
What's driving the preference for BHP?
It comes down to earnings sensitivity and valuation.
Macquarie's analysis shows that both BHP and Rio shares are pricing in iron ore forecasts below the broker's own estimates — around US$72/dmt for BHP and US$75/dmt for Rio.
But despite this, Macquarie favours BHP due to its lower operating leverage and more attractive valuation profile, especially when factoring in long-term growth from copper and potash. It said:
BHP still the one: As noted in our "Liberation day road map" a combination of low operational leverage (noted in the EPS sensitivity), a low implied Fe price and a higher NAV value skew indicating long-dated growth, we see BHP's rebased valuation level as an attractive entry/re-entry point given the recent sell-off.
And while Rio's valuation is not overly stretched, Macquarie sees it as more sensitive to commodity price swings, particularly in iron ore and aluminium. That added volatility, paired with a less attractive valuation, makes it the less compelling of the two, at least for now. It said:
Movements in iron ore, aluminium, and copper prices present the most significant upside and downside risks to our earnings forecasts and valuation. We make assumptions within our forecasts for production, capex, and opex in addition to exchange rates. Variances in these assumptions versus our base case present material risks both to the upside and downside to earnings forecasts and valuation.
Foolish takeaway
BHP and Rio shares will always be go-to names for ASX investors looking for exposure to iron ore and global resources. But if you're trying to decide between the two today, Macquarie is leaning toward BHP — citing a more attractive valuation, lower earnings volatility, and a clear growth pipeline.
Of course, as always, commodity prices will play a big role in how both stocks perform from here. But in Macquarie's view, if you're picking just one, BHP looks like the better buy right now.
