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Which is the cheapest big miner to buy today?

Photo: BHP Billiton. Fair use.

Investors looking to buy into a top blue-chip miner generally find themselves asking the question: should I go for BHP Billiton (LSE: BLT) or Rio Tinto (LSE: RIO)?

Unfortunately, when it comes to valuation there are two factors that can lead investors astray. I’ll tell you about them and then look at the valuation of the two companies today.

Two factors often overlooked

The first thing we need to understand is that BHP and Rio are both dual-listed companies (DLCs). A DLC is two corporations, with separate stock exchange listings and registers of shareholders, but which functions and reports its accounts as a single operating business. In the case of BHP and Rio, this means we need to add together the market capitalisations of their London-listed and Australian-listed entities for any ‘price-to’ valuation measure we calculate, such as price-to-book (P/B).

The second issue investors often overlook is that the two companies have different financial year-ends. BHP’s is 30 June and Rio’s is 31 December. In volatile times for commodities, profits can change dramatically over six months. In order to value the companies on a like-for-like basis we need to compare not their latest annual numbers or forecast annual numbers, but trailing 12-month (ttm) or forward 12-month (ftm) numbers.

Price-to-book

  Recent share price (p) Market cap (£bn) Net assets at 31/12/16 (£bn) P/B
BHP 1,346 71.6 (UK 28.4+ Aus. 43.2) 50.75 1.4
RIO 3,355 60.6 (UK 46.4 + Aus. 14.2) 37.18 1.6

You’ll find at least one popular financial website currently showing BHP with a P/B of 0.6 and Rio with a P/B of 1.2. This is an error, which comes from not including the Australian part of the market cap. So don’t make the mistake of thinking that BHP is trading at a bargain discount to net assets.

Price-to-sales

For P/S we need to remember not only to use the combined UK/Australian market cap, but also ttm and ftm numbers

  Sales ttm (£bn) P/S ttm Sales ftm (£bn) P/S ftm
BHP 27.64 2.6 31.9 2.2
RIO 27.46 2.2 31.1 1.9

Again you may find some financial websites giving lower P/S ratios, particularly for BHP. Indeed, BHP actually comes out cheaper than Rio, if you make the mistake of forgetting the Australian part of the market cap.

Price-to-earnings and dividend yield

The same considerations need to be applied for P/E and dividend yield, although here we’re helped by the companies’ accounts giving earnings per share and dividend per share (correctly calculated using the total of UK and Australian shares).

  P/E ttm P/E ftm Yield ttm Yield ftm
BHP 21.7 13.7 3.2% 4.4%
RIO 14.5 10.0 4.0% 5.6%

Bottom line

BHP is currently a bit cheaper on P/B but Rio comes out as better value on P/S, P/E and yield. If I had to pick one stock, I’d go for Rio but with both looking reasonably cheap against the market as a whole, I might be inclined to spilt a holding between the two.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.