During the first half of 2014, there has been a considerable amount of doubt surrounding the long term sustainability of the Chinese growth story. Indeed, China missed its own first quarter GDP growth target by 0.1% (7.4% versus 7.5%) and, as such, companies that are largely dependent upon China for future growth have been weaker this year.
However, with Chinese PMI data showing an increase in activity for the first time in six months, now could be a great time to buy back into the Chinese growth story. And there’s no better place to start than with mining companies Rio Tinto (LSE: RIO) (NYSE: RIO.US) and BHP Billiton (LSE: BLT) (NYSE: BBL.US), both of which are heavily reliant upon China for future growth.
BHP Billiton
As one of the most diversified mining stocks in the world, BHP Billiton tends to be less prone to the ups and downs of metal prices than many of its peers. However, even it remains highly reliant upon China for future growth and, as such, management decided to mothball a number of major projects and mines over the last year due to their simply not being economically viable at current commodity price levels.
This was a wise move and allows BHP Billiton to focus on keeping its cost base low when demand weakens, while retaining the potential to increase future production should it become viable to do so. With its shares having had a rather muted performance s far this year (they are up 2%, while the FTSE 100 is flat), they seem to offer good value at current price levels. Indeed, trading on a price to earnings (P/E) ratio of 11.9, they seem to offer good value compared to the FTSE 100 P/E of 13.9. In addition, a yield of 3.9% puts them firmly in income investor territory, too.
Rio Tinto
Although sector peer, Rio Tinto, is far less diversified than BHP Billiton, it stands to gain the most from a Chinese recovery. That’s because it focuses on iron ore, whose demand closely tracks the emerging market growth story. As with BHP Billiton, Rio Tinto has had the foresight to mothball new projects until they become economically viable and this patient strategy appears to be paying off, with Rio Tinto continuing to maintain one of the lowest cost bases in the iron ore mining industry.
Shares in Rio Tinto are down 8% year-to-date and, as such, offer great value at current levels. A P/E of just 10 seems far too low for a company of the quality of Rio Tinto, while a yield of 4% makes it an attractive income play, too.
