Vale SA (ADR) (VALE), Rio Tinto plc (ADR) (RIO): A Look Into The Iron Ore Marketplace

The way I see it, only the finalization of any of the various asset sales (that I expect to fetch $10 to $12 billion), could help Rio Tinto plc (ADR) (NYSE:RIO)shares going forward. Trading at a 2013 5.6 EV/EBITDA it is tough not to see Rio Tinto as an opportunity. Nevertheless, the company’s specif issues are too many. I would stay on the side lines.

BHP Billiton Limited (ADR) (NYSE:BHP): Quality comes at a price

Iron ore and petroleum account for the majority of BHP Billiton Limited (ADR) (NYSE:BHP)’s production growth from 2013 to 2018. As iron ore prices are expected to be soft going forward, EBIT margins should moderate from a high 63% in 2012 to a still very high 47%. Petroleum accounts for 41% of forecast capital expenditures to 2018 and the majority of this is expected to go to onshore activities. That said, petroleum EBIT margins are forecast to decline from 47% to 37%.

Apart from macro and commodity price trends (soft iron ore prices), company specific catalysts include potential project approvals after August: Spence and Cannington Base Metals projects, and the Greenfield Jansen potash project. Those projects should be prioritized to still allow for an overall declining capital expenditures profile (from the guided $22 billion this year) and moderating debt level. Conversely, asset sales are also on the table with speculation that many of its non-core assets could be up for grabs.

Trading at a 2013 7 EV/EBITDA, BHP Billiton Limited (ADR) (NYSE:BHP) is considerably more expensive than the two peers named above. That said, the group is more diversified out from metals. Nevertheless, I would not go long BHP Billiton Limited (ADR) (NYSE:BHP) at the current level.

Bottom line

Despite its lower cash dividend yield (at 2.4% versus 3.5%), out of the three companies named above, I would only go long Vale SA (ADR) (NYSE:VALE). While Rio Tinto has too many company-specific issues, BHP Billiton Limited (ADR) (NYSE:BHP) seems to expensive for its risk profile. Of course all three companies are great enterprises and cash flow generators. As a matter of fact, they pay fair dividend yields while they sustain their capital expenditure needs without pushing debt too high.

The article Iron Ore: The Market and Main Players originally appeared on Fool.com and is written by Federico Zaldua.

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