There’s no denying that BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) have both underperformed this year. Indeed, as concerns about global growth grow and the price of iron ore slumps, investors have turned their backs on the two mining giants, seeking better opportunities elsewhere.
However, even though Rio and BHP have underperformed this year, the two companies have outperformed over the long term. For example, BHP and Rio have, over the past ten years, outperformed the FTSE 100 by 152% and 72% respectively, excluding dividends.
And rather than concentrating on the short-term performance of these miners, shareholders should instead evaluate the performance of these companies over the long term.
Long-term supercycle
Rio and BHP are two of the world’s largest miners, therefore they are highly dependent upon the commodities supercycle. A trend that has emerged within the commodities market during the past 200 years.
These supercycles generally last around 20 years, or they have done based on historic figures. The average cumulative gain in the price of commodities over these two decades, for which the cycle lasts, has been 293%.
According to some analysts, the last supercycle started during 2000, so we are around halfway through. However, it seems as if this cycle has ended prematurely, as a rising level of supply but lack of demand has pushed the price of many commodities down.
Nevertheless, the world continues to grow and emerging, as well as developed markets continue to spend on infrastructure projects. So, it stands to reason that the world will enter another commodity supercycle in the near future.
And for this reason Rio and BHP, are solid picks at current levels. You see, as some of the mining industry’s largest players, Rio and BHP are likely to weather the storm better than most. Further, Rio and BHP can use their size and cash generative nature, to acquire peers during the market slowdown, ready to rebound rapidly when the market picks up again.
Paid to wait
Of course, it’s going to take several years, possibly even decades before the next supercycle kicks in. That’s why Rio and BHP should only be considered as long-term investments.
That being said, the two miners also make great income investments in the low interest rate environment. At present levels, BHP supports a dividend yield of 4.5%, while Rio supports a yield of 4.5%. These payouts are currently covered more than twice by earnings per share. Additionally, it would appear as if further cash distributions are on the cards.
For example, both Rio and BHP have discussed the possibility of share buybacks, if they cannot find suitable opportunities to deploy capital elsewhere. If the two groups do decide to spend cash acquiring their own shares, when the commodity market starts to recover, earnings per share should rocket higher.
The bottom line
So all in all, BHP and Rio are two great long-term investments that are set to benefit from global growth and the next commodity supercycle.
