Randgold Resources (LSE: RRS), Rio Tinto (LSE: RIO) and BHP Billiton (LSE: BLT) may all be miners and share the distinction of being FTSE 100 companies, but they also have significant differences.
So, what are these differences, and which company is primed to deliver the best returns for investors today?
Golden opportunity
Randgold Resources, as its name suggests, is focused on gold. As such, the price of the precious metal has a huge influence on the performance of the business. Gold reached an all-time high of over $19 in 2011, but is now trading at around $11 (down over 40%).
Randgold occupies an incredibly strong position in an industry that chief executive Mark Bristow says is “buckling under the pressure of the gold price downturn”. Randgold’s business model is based on gold at $10. The company has $100m cash on the books and no debt, and reckons this would grow to $500m-$700m over the next couple of years, if gold were to stay in the $11-$12 range.
Randgold’s position contrasts markedly with that of its rivals. According to Bloomberg, the big gold producers are weighed down by a record debt load of $31.5bn. Mr Bristow has outspokenly suggested that many producers will be “toast” if gold remains at the current price of $11. He is able to gloat: “We are also very mindful that the increasing stress in the market may create interesting long term opportunities, and we are watching carefully for these”.
Randgold has a strong “last-man-standing” position, if things come to it, a balance sheet that enables it to buy distressed assets, and the potential to be a big beneficiary when an upturn comes. A rise of over 100% in the shares — trading at £38.50 as I write — would only get them back to their previous peak. On this basis, I see Randgold as a buy at the current level.
Race to the bottom
Rio Tinto is almost as singularly focused on one commodity as Randgold, with 87% of its earnings coming from iron ore. Meanwhile, BHP Billiton has recently demerged a swathe of assets — aluminium, coal, manganese, nickel and silver — but remains less reliant on a single commodity. Broadly speaking, iron ore accounts for half of Billiton’s revenue, with copper a quarter, and potash and petroleum a further quarter.
The price of iron ore has slumped even more heavily than that of gold, being down over 70% from its peak, which is obviously not good for Rio. However, Billiton’s diversification hasn’t helped it that much, because we’ve also had hefty declines in the prices of copper (45%) and oil (65%).
In the face of over supply, both Rio and Billiton are actually increasing production, while engaging in a race to the bottom to become the world’s lowest cost iron ore producer. Both companies can benefit from driving out rivals who can’t compete on costs, but I prefer Rio. Rio can maintain its position as the lowest-cost producer, because it is years ahead of Billiton on investment in automation, its ports are cheaper and its superior blending capabilities mean a superior realised price.
Rio has less debt ($12.5bn net) than Billiton ($25bn net), and while both companies have attractively high dividend yields, analyst earnings forecasts suggests that Rio’s payout is the more secure. In Billiton’s favour is the previously mentioned diversification and also the fact that its shares have fallen further from their peak of four or five years ago: 55% compared with Rio’s 45%.
Both companies look good value to me — at prices of £11.60 (Billiton) and £25.50 (Rio) — but, I think Rio’s qualities give it the edge as the stronger buy. I reckon a base metals and precious metals combination of Rio and Randgold could deliver strong returns for long-term investors, although share prices could be volatile in the short term.
