Is Rio Tinto plc Or Kaz Minerals PLC The Best Way To Play Commodities Today?

The only consolation for investors holding shares in beleaguered mining giant Rio Tinto (LSE: RIO) is that it could have been worse: they could be holding the even more beleaguered BHP Billiton (what do you mean, you hold both!). Rio has fallen 22% in the last 12 months, which makes it look relatively defensive compared to BHP, which has fallen by almost double that amount, or 42%.

Rio Tinto is helped by the fact that after investing heavily in its Australian mines it now has some of the lowest iron ore production costs in the world. Chief executive Sam Walsh is still able to describe his baby as a cash machine. The company is still making decent margins even as the price of iron ore, Rio’s chief commodity, looks set to crash through the $50 a tonne mark. That is doable with costs of as little as $16.40 per tonne in its Pilbara mines.

Rio Loses Brio

Seen like this Rio’s strategy of ramping up production — with Q3 iron ore production up 12% year-on-year and 8% on Q2 — makes sense, especially if it is testing the mettle of higher-cost rivals. It also suggests that Rio Tinto can continue to hold out against the commodity price collapse. Trading at just 6.95 times earnings the price is firmly in bargain territory, but it is still only worth buying if you expect a commodity revival, which personally, I don’t yet. You could buy Rio for its chunky 5.82% yield, but it is hardly rock solid. Shareholder payouts cost the company £2.2bn in the first half of this year, money it can’t afford to keep shelling out unless prices recover soon.

Copper Bottoms

Nobody has escaped the commodity sell-off but copper-focused miner Kaz Minerals (LSE: KAZ) has been hit harder than most and is now down 93% in five years. All is lost, the FTSE 250 listed miner is up 10% in the last week, after reaching agreement with its principal construction contractor, Non Ferrous China, to defer payment of £198m relating to the company’s Aktogay project.

The construction costs which were due to be paid in 2016 and 2017 but can now be settled in the first half of 2018. Aktogay remains on track to commence production from oxide ore in 2015 and sulphide ore in 2017. This should grant it some extra liquidity to help especially its Bozshakol and Aktogay copper projects, although of course the money still has to be paid. It may be worth mentioning that Kaz is also sitting on a worrying total net debt pile of $1.85bn.

The deferred settlement doesn’t change the fact that copper is predicted to have a dismal year in 2016, as China’s industrial sector tips into recession. Copper recently fell to a six-year low with the price falling below $4,600 per tonne, while International FC Stone sees that hitting $3,800 next year. The danger is that by deferring its debt repayment the Kazakhstan producer is simply drawing out the agony.

If King Copper tells us where the global economy is heading, then beware the miners in general and Kaz in particular. If you reckon that China will rebound, however, Kaz Minerals could be a thrilling way to play the recovery. But that certainly isn’t something I would do right now.

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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.