BHP [stock_market_widget type="inline" template="generic" color="default" assets="BHP" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], Rio Tinto [stock_market_widget type="inline" template="generic" color="default" assets="RIO" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"], and Vale ([stock_market_widget type="inline" template="generic" color="default" assets="VALE" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] are the largest diversified mining companies in the world, with market values of $142-, $107- and $70-billion respectively. Large diversified producers have proven to generate strong returns over the long term due to their ability to allocate capital across a range of commodities and regions.
These stocks all pay very attractive dividends and are a good way to diversify a portfolio. Commodities benefit from a weaker U.S. Dollar and, after a decade of underperformance, resource producers are trading at a steep discount to other sectors. They may have run hard this year, but still look attractive on a long-term view.
Rio has been the star performer since 2016, though BHP and Vale’s stock prices have made up some ground over the last 18 months. So, which of the three is best placed going forward?
The Product Mix
BHP earns 34% of its revenue from iron ore, 31% from copper, 21% from coal, and 13% from petroleum. In 2015 BHP spun off its aluminum assets which had previously been a large part of the business.
Rio earns 42% of revenues from iron ore, 29% from aluminum, 15% from copper and diamonds, and 13% from energy – though it has now sold its energy assets.
Vale has far higher exposure to iron ore where it generates 55% of its revenue. It also earns 20% from other ferrous metals, 18% from base metals and 4% from coal. The base metals component includes limited revenue from PGMs, gold, and silver.
Vale Is the Riskiest of the Three
Vale has underperformed its peers since January when a dam wall collapsed at its Córrego do Feijão mine in Brazil. The disaster killed at least 237 people and followed a similar disaster at another mine in 2015. These disasters may result in liabilities in the future and are likely to continue to weigh on sentiment. In addition, Vale has a questionable environmental and safety record and may come under increasing regulatory pressure.
Vale’s dam disaster resulted in a slew of analyst downgrades. However, now that the discount between Vale and its peers has widened, analysts are beginning to upgrade the stock again.
While Vale may be attractively priced, its environmental and safety records may become a problem for the company again. But the biggest risk is the fact that the company’s product mix is so focused on iron ore and other ferrous products. This may or may not work in the company’s favour but doesn’t offer investors a really diversified investment.
BHP vs Rio
In terms of valuation, BHP does appear more expensive, and it has a lower dividend yield. So, based on valuation alone, Rio appears the better option. But the product mix also needs to be considered.
Rio has slightly higher exposure to iron ore than BHP, but the difference is relatively marginal. Rio also earns higher margins from iron ore, though those are offset by the very low margins it earns from aluminum. BHP doesn’t produce aluminum but does produce copper where it earns much higher margins.
On balance, there really isn’t much between the two. However, BHP does have one other slight advantage. While Rio has sold its energy assets, BHP still earns some revenue from both coal and petroleum. This means that if energy prices rise, its increased energy profits will offset rising costs elsewhere in the business. This makes BHP a slightly safer option for long-term investors.
