Is Antofagasta plc A Realistic Alternative To Rio Tinto plc And BHP Billiton plc?

opencast.miningAfter the disappointment of recent years, it looks as though the mining sector could be on the up. Indeed, with the macroeconomic outlook for emerging markets continuing to be uncertain, now could be a good time to invest in companies such as Rio Tinto (LSE: RIO) (NYSE: RIO.US) and BHP Billiton (LSE: BLT) (NYSE: BBL.US), with growth set to return to the sector after a few difficult years. In addition, valuations of the big two remain relatively attractive, while prices have fallen to a level where yields are bringing the stocks into income-seeking investors’ territory. However, should investors look at smaller mining companies, too? Could Antofagasta (LSE: ANTO) be a realistic alternative to Rio Tinto and BHP Billiton?

A Different Prospect

Although BHP Billiton is a highly diversified mining company, Rio Tinto is not. Indeed, in 2013 it relied on iron ore for over 90% of its profits, so the fact that Antofagasta is focused on copper mining in the same way that Rio Tinto is focused on iron ore should not be held out as a major negative. Moreover, Antofagasta’s forecast growth rate easily beats those on offer at Rio Tinto and BHP Billiton, with the copper miner expected to post earnings per share (EPS) growth of 21% this year and 8% next year.

Certainly, Rio Tinto is also a strong growth prospect, with an EPS increase of 11% pencilled in for next year, although BHP Billiton disappoints on this front. It is forecast to see a decline of up to 4% in the bottom-line next year, although its long-term prospects remain sound.

While Antofagasta offers potentially higher growth rates, it also comes at a higher price. Shares in the company currently trade on a price to earnings (P/E) ratio of 17.4, which is considerably above the FTSE 100’s P/E of 13.8. However, it is even higher than the P/Es of Rio Tinto and BHP Billiton, which trade on ratings of 10.8 and 12.6, respectively. Certainly, Antofagasta’s growth rate explains a lot of the premium, but it does not scream value versus its two larger rivals. This is further reflected in the companies’ yields, where Rio Tinto and BHP Billiton offer yields of 3.8% and 3.7% respectively, while Antofagasta yields just 2%.

Looking Ahead

With the mining sector having endured a difficult few years and the macroeconomic outlook looking uncertain for emerging markets, it could be a sensible move for investors to stick with the largest UK-listed mining stocks, Rio Tinto and BHP Billiton. They may not match Antofagasta in terms of growth, but offer much better valuations, higher yields and, ultimately, lower cost curves due to their size and scale. Therefore, the big two still appear to dominate.

Of course, mining may not be the top-performing sector in future. That's why The Motley Fool has put together a free and without obligation guide to the sectors we're tipping for success in the second half of 2014.

The guide is simple, straightforward and you can put it to use right away. It could help you to uncover stocks that give your portfolio a boost and make 2014 an even better year for your investments.

Click here to take a look.

Peter Stephens owns shares in BHP Billiton.