After five years of torment, investors in stricken mining giants BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO) are finally enjoying some respite. Their share prices are up 10% and 13% respectively over the last month, reversing years of decline. Is there more to come?
Nobody will be getting too excited just yet. BHP Billiton is still down 26% over the last 12 months, Rio Tinto is down 18%. Over five years, performance is far worse. The commodity sector is famously cyclical but contrarian investors who have chanced their arm in recent years have been punished for their haste. Nevertheless, recent signs of life will encourage the optimists to try their luck again.
BHP’s latest operational review showed a drop in petroleum and copper production in the three months to 30 September. Oil was hit by industrial action at Bass Strait and more worryingly, natural field decline across its portfolio, although production has started creeping up again. Copper production was down 13% since June due to anticipated grade decline at Escondido. Iron ore did rise 7% year-on-year to 61m tonnes.
Chief executive Andrew Mackenzie said the group is on track to meet full-year production targets and continues to invest to create shareholder value, including acquiring prospective oil acreage in Western Australia and the Western Gulf of Mexico. Investors will be pleased to see signs of positivity, in an industry that has been relentless retrenching, cutting costs and slashing capex.
RIO, To Go
Rio Tinto also suffered a drop in copper production in Q3, down a brutal 24% to 115 kilotonnes. Increases in iron ore shipments and production of 17% and 12% respectively were little compensation. Lower copper production may help to put a floor under the recent price plunges but it is the kind of slip-up Rio doesn’t need given headwinds elsewhere.
Trading at just 7.62 times earnings, Rio Tinto looks more temptingly valued than BHP Billiton, which trades at a surprisingly pricey 14.47 times earnings. It is doubly surprising given that Rio Tinto has performed relatively better over the last few years. Of the two companies, this is the one I would buy, despite a low yield of 5.43%, against a whopping 7.62% at BHP. Although Rio’s recent copper miss does concern me.
China On My Mind
I still think it is too early to dive back into commodities: China is still slowing and metals and minerals prices are still falling. Chinese Premier Li Keqiang’s recent statement that he would not “defend to the death” 7% annual GDP growth was an admission of what everybody knows: the glory growth days are gone.
They won’t be coming back, either. Japan is easing. China is easing. The European Central Bank is easing. The Bank of England is running scared of hiking interest rates. US Federal Reserve doves are in the ascendant again. But none of this is able to trigger sustainable global growth.
At today’s yields and valuations, BHP Billiton and Rio Tinto are tempting buys for long-term investors. Just don’t expect a rapid return to former highs.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.