Rio Tinto plc (ADR) (RIO), BHP Billiton Limited (ADR) (BHP): One Bullish Argument and 2 Bearish Arguments on This Miner

As a result, several investors have asked its board to reconsider the expansion plan, and instead use its $5 billion cash to reduce its outstanding debt.

How do its peers fare?

As of now, both Rio Tinto and its competition seem to be debt ridden. Vale SA (ADR) (NYSE:VALE) is operating with a debt/equity ratio of 42% with total long-term debt of $29.93 billion. Its shares have tanked by nearly 35% over the last year, and analysts estimate its annual EPS to shrink by 4.46% over the next year. This is because most of its debt is external, and the depreciating Brazilian Real is inflating its interest payments.

Meanwhile BHP Billiton Limited (ADR) (NYSE:BHP) is operating with a debt/equity ratio of 53% with total long-term debt of $28.33 billion. But unlike its peers, BHP Billiton Limited (ADR) (NYSE:BHP) is actually showing signs of a turnaround.

Instead of expanding capacity, the company has scrapped its coal projects which were due for FY13. The company also announced the sale of its $1.5 billion stake in Jimblebar iron ore mine along with its coal mines in Australia to reduce its debt. The company has sold $6.5 billion worth of assets over the last 2 years, which have played a vital role in arresting its inflating debt. And to top it all off, BHP Billiton Limited (ADR) (NYSE:BHP) also has a $1.9 billion worth of annual cost saving plan to solidify its turnaround story.

Final words

To be frank, I don’t see how rising capital expenditures and capacity expansions can bolster Rio Tinto’s short to medium-term profitability. It may turn profitable over the long run, but I believe BHP Billiton Limited (ADR) (NYSE:BHP) offers more value as compared to Rio Tinto or Vale SA (ADR) (NYSE:VALE).

Piyush Arora has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads. Piyush is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article 1 Bullish Argument and 2 Bearish Arguments on This Miner originally appeared on Fool.com is written by Piyush Arora.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.