Digging Deeper into the Mining Giants: Why BHP Billiton will Reign Supreme
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When people think of the mining industry, there are essentially two names that come to mind: BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO). These two giants have been trying to cut up the same pie for decades. Looking forward, who has the highest chance of success? Let’s take a look.
Looking at the financials of both companies, BHP shows that it is able to do more with the assets it has on hand. Even with 18.5% more in total revenue than Rio, BHP’s capital expenditures are 6% lower. One would think that this would result in a higher premium for BHP shares, but as of right now that is quite the contrary
|
Company |
Debt/Equity |
P/E |
Dividend Yield |
Payout Ratio |
|
BHP Billiton |
36.23 |
7.62 |
3.5% |
21% |
|
Rio Tinto |
38.7 |
15.51 |
3.2% |
39% |
Source: Yahoo! Finance
The trailing P/E for BHP has been nearly half of what Rio has been trading for; seems to me like the value play now is with BHP. Also, with a more generous yield at a lower strain on the profit margin for the company, I don’t see the case for buying Rio over BHP. Perhaps we need to look a little more forward to see if there is something in the pipeline for both companies.
What I want to see in a company that is in such a highly cyclical market is revenue diversification. What makes revenue diversification right now so critical? Plain and simple; the answer is China. China is far and away the largest producer of steel (46% of all steel output). With predictions of China taking their foot off the gas pedal for a bit to deflate the potential construction bubble, these big players in iron ore will need to get their revenue from other sources.
This paints BHP in an even more attractive light. They have a much more diversified revenue source. In 2011, over 80% of all of Rio’s revenue came from the sale of iron ore. Conversely, BHP only depends on iron ore for 43% of its total revenue. While both have been diversifying, BHP’s expansion into energy seems to be the better play than Rio’s move to expand its aluminum production through the purchase of Alcan. The acquisition of PetroHawk and a purchase of assets from Chesapeake Energy (NYSE: CHK) by BHP has vaulted them into the top ten for independent upstream oil and gas companies in the world.
This could turn out to be an incredibly smart move by BHP, who appears to be big on the expansion of natural gas in the United States. Despite the low gas prices at present time, this appears to be an excellent long term investment.
So, who would you go with? A company that is more efficient, pays a higher dividend, sells at a lower premium, and is building their hand in an up and coming market; or the other guy. I know where I would put my money.
TylerCrowe has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. 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.If you have questions about this post or the Fool’s blog network, click here for information.
