A miner headache: Rio Tinto plc or BHP Billiton plc?

Bilaal Mohamed compares the investment appeal of FTSE 100 mining giants Rio Tinto plc (LON: RIO) and BHP Billiton plc (LON: BLT).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Mining stocks have had a rough time in recent years with commodity prices plummeting as a result of weaker global demand, particularly from China. This is just one of the many risks facing investors as mining shares can be highly geared to the price of the metals they mine. In other words, a well-run and well-diversified global mining business can sometimes fall foul of a collapse in the price of any particular metal or mineral leading to a crash in the share price. Unfortunately looking for advice can sometimes lead to further confusion as experts often have widely opposing views as to where prices could be heading.

No-one can predict to any degree of certainty what’s going to happen over the short, medium or long term. Nevertheless, many investors will have noted the strong gains made by FTSE 100 miners this year, and may be itching to get in on the action, wondering what to buy, and when. So for keen investors wishing to position themselves for a long-term recovery I would say Rio Tinto and BHP Billiton have traditionally been the mining stalwarts of the FTSE 100, and have been less volatile and risky than their smaller counterparts due to their size and diversification. So which one should you pick for the long term?

Record breaker

In 2011 Anglo-Australian giant BHP Billiton (LSE: BLT) was riding high and enjoying the commodities boom with investors happy to pay more than £26 per share for the privilege of owning a tiny slice of the business. But fast forward five years and by January 2016 investors weren’t even prepared to pay just £6 for the shares. Bearing in mind that BHP Billiton is one of the world’s largest and most diversified miners, would-be investors can begin to appreciate the volatility that can affect the sector.

Earlier this year the Melbourne-based firm announced it had posted a record loss for the financial year ended June thanks to weaker commodity prices and the fatal dam disaster in Brazil. BHP posted a record-breaking US$6.4bn loss for FY2016, compared to the US$1.91bn profit reported a year earlier, forcing the company to cuts its full-year dividend payout by a massive 76%. Furthermore, there still remains a great deal of uncertainty regarding compensation claims relating to the Brazil dam disaster, and with a fairly steep valuation at 21 times forward earnings, BHP is a risk too far for me.

Low cost producer

Meanwhile BHP’s great rival Rio Tinto (LSE: RIO) is in the midst of a major cost-cutting exercise with further cuts planned for this year and next, while also cutting back on its expansion projects after previously being criticised for being too aggressive. The London-headquartered group trades at a more modest earnings multiple of 16 compared to BHP, and also benefits from being one of the lowest-cost producers compared to its peers. For this reason, Rio gets my vote over its Anglo-Aussie rival BHP. However, I would suggest investors drip feed into the stock over a longer period, rather than try to time the market.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Rio Tinto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »