Recent Events
BHP Billiton, the world’s largest miner, is betting on strong returns from the copper business, even though the price of the metal is unlikely to rise because there is a strong demand for copper. Global demand for copper is likely to rise by 3 % annually. BHP Billiton Limited (ADR) (NYSE:BHP) is investing heavily to expand its operations regarding copper extraction; it has recently announced a $3.43 billion investment in a sea desalination plant at an Escondida mine it controls in Chile.
Moreover, the company is expanding rapidly in the Pilbara region to feed the Asian economies like China and various others with iron ore, which is used to make steel for industries ranging from auto manufacturing to construction. The company has hit a record high iron ore production, up by 17.7%, which is used to fuel these emerging markets. Lastly, BHP expects to expand the Jimblerbar mine by the end of this year. Development of this mine will increase BHP Billiton Limited (ADR) (NYSE:BHP)’s iron ore output capacity tremendously.
Vale suffered a 10.7% decrease in its revenue this quarter primarily due to the effects of lower volumes. It managed to surge its margins by 38% this quarter due to the cost reduction strategies the company implemented. However, on the down side, the Chinese economy is the largest consumer of Vale SA (ADR) (NYSE:VALE)’s output, which leaves the company vulnerable to demand declines in China. Due to it’s over-dependence on China, continuing efforts by Chinese authorities to shift its economic model toward consumption, away from investment, could deal a blow and undermine demand for metals.
Vale SA (ADR) (NYSE:VALE)’s iron ore output has remained flat largely as a result of delays in environmental licensing for projects, but recently the company has been granted a license to invest $20 billion in new iron ore production capacity at its Carajas mining complex. This will help Vale SA (ADR) (NYSE:VALE) surge its iron ore production, deeply benefiting the company.
Rio Tinto is struggling to pay off its $19 billion debt to get its balance sheet in a better shape. The company is struggling to sell its assets, since volatility in the commodity prices and higher debt costs cause buyers to pay up such huge amounts. The company is attempting to sell of more than a dozen of its smaller operations in a response to weaker commodity prices, sluggish growth in China and to pare $19 billion in debt.
In its struggle, the company has been able to secure a deal with China Molybdenum, Rio Tinto plc (ADR) (NYSE:RIO) has sold its controlling stake in Northparkes copper-gold mine for $820 million as part of efforts to reduce debt. Due to stringent cost reduction measure and efforts to sell off assets, the company is avoiding any investments to enhance its operations or explore new opportunities.
Tracking competition
| Indicators | BHP Billiton | Vale | Rio Tinto |
|---|---|---|---|
| Price/Earnings TTM
| 17.9 | 15.2 | – |
| Price/Book
| 2.6 | 1.4 | 1.4 |
| Revenue Growth (3 Yr. average) | 12.9 | 27.0 | 6.8 |
| Net Income Growth (3 Yr. average) | 37.9 | 1.0 | – |
| Return on Equity
| 14.7 | 8.1 | -6.0 |
| Dividend Yield
| 3.55% | 2.69% | 3.62% |
| Current Price
| $63.84 | $14.18 | $45.15 |
Data from Morningstar on July 29, 2013
BHP Billiton Limited (ADR) (NYSE:BHP) has been able to provide decent dividends increasing at a modest rate, which depicts stability in its operations. Moreover, BHP has reported a very high growth in its net income as compared to its peers, primarily due to strong returns from its copper business.
On the contrary, however, dividends for Rio Tinto plc (ADR) (NYSE:RIO) and Vale have been falling due to the intense downward demand cycles the companies are facing. Rio Tinto plc (ADR) (NYSE:RIO) has taken a nose dive in terms of dividends, but slowly and gradually the situation is improving as the company is selling off its smaller holding to increase returns.
Moreover, BHP Billiton Limited (ADR) (NYSE:BHP) has a moderate payout ratio of 38%, which allows the company to retain enough cash to fuel its growth prospects. While, on the other hand, Vale SA (ADR) (NYSE:VALE)’s payout ratio is 108%, which means the company has to struggle to invest in long term growth projects, which might help the company to provide its investors with greater returns. As evident from the table, BHP also scores high on the ROE metric, whereas the other two companies struggle with their ROEs.
Final thoughts
BHP Billiton Limited (ADR) (NYSE:BHP), among its competitors, is in a much better position to deserve your investment because the company is well diversified with its presence in Oil and Gas development sector as well. Most recently, the company has been focusing on increasing its sales in the emerging markets. These growth markets offer huge opportunities, since lack of infrastructure in these markets has aptly increased the demand for iron ore and copper. Moreover, the company seeks to invest more on petroleum and copper targets, where profit margins can be strong.
On the contrary, Vale is struggling with its sales, which have dropped in the recent quarter due to Vale SA (ADR) (NYSE:VALE)’s over-dependence on the Chinese economy, which has slowed down recently.
Rio Tinto plc (ADR) (NYSE:RIO), on the other hand, is struggling to improve its debt ratios and bolster its balance sheet by paying off its debt. The company has settled down to sell off profitable businesses; one common example is its deal with China Molybdenum. To my understanding, this has led Rio Tinto plc (ADR) (NYSE:RIO) to lose its sight for growth to enhance further prospects, so that it can provide constant returns to its investors. A recent drop in its dividends is a testament to its shortsighted strategies to provide its investors with returns on their investments. So, all in all, in the current economic scenario, BHP Billiton Limited (ADR) (NYSE:BHP)’s stock presents a better opportunity to invest in.
The article Which Global Mining Company Should You Buy? originally appeared on Fool.com and is written by Zain Raza.
Zain Raza has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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