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Should You Turn Your Back On BHP Billiton plc And Rio Tinto plc For This Commodities Trader?

Mining behemoths BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) have received a lot of positive press during the last few months as they work hard to drive profits higher and improve cash returns to investors.

However, Glencore Xstrata (LSE: GLEN) has been working harder, realising billions of dollars in operational synergies from the company’s merger with Xstrata last year and driving forward with many new growth projects. 

So, should you turn your back on BHP and Rio for Glencore?

rio tintoThe argument for Glencore

The biggest advantage Glencore has over its larger peers, is the company’s marketing business. Specifically, Glencore sources, ships and trades commodities of all types, all over the world. This marketing business is highly defensive and has helped cushion the downturn in Glencore’s traditional mining business.

Aside from Glencore’s marketing business, the company’s most attractive quality is its way of doing business. In particular, unlike Rio and BHP, Glencore does not embark on multi-billion dollar greenfield mine development projects. Instead, Glencore acquires struggling mining projects and turns them around, removing many of the risks and costs associated with traditional exploration and development assets.

Further, Glencore is engaged in the production of oil and gas and it has been reported that the company’s management is working on a $1bn collaboration deal with Russia’s Russneft, one of the Russia’s top 10 oil producers. 

The argument against

Still, while Glencore has many attractive qualities, the company is still fundamentally, a coal and copper miner. Unfortunately, as the prices of both coal and copper have pushed to new lows during past few months, Glencore is likely to suffer.

That being said, both BHP and Rio are still fundamentally iron ore miners, although BHP, like Glencore is getting into the oil and gas business. Specifically, BHP is currently investing billions into shale gas projects within the United States, reducing the company’s dependence on iron ore.

The other key advantage that Rio and BHP have over Glencore is a lower level of debt. For example, at the end of the 2013 financial year, BHP and Rio had a debt to equity level of 50% and 62% respectively, while Glencore’s debt to equity ratio was 110%. This high level of debt was is mostly attributable to the Xstrata acquisition. 

Summary

So, Glenore’s has many attractive qualities, the most important of which is the company’s marketing business. Nevertheless, Glencore’s high level of debt is worrying and this could hold the company back in the future.

All in all, Glencore is an attractive investment mostly due to the company’s diversification; however, BHP could be a better choice as the company’s drive into oil business will reduce its dependence on iron ore, and the company’s level of debt is lower than that of Glencore. 

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Rupert does not own any share mentioned within this article.