Both companies took a hit from severe weather, but are still expected to report strong profitability figures.
BHP (BHP) and Rio Tinto (RIO) benefit from rising iron prices
- Iron ore is a major part of both businesses and so they are benefitting from the sharp rise in iron prices following the dam collapse in Brazil.
- BHP and Rio are making good cash flows and paying attractive dividends.
- The updates reiterate our preference for both groups over others in the sector such as Glencore and Anglo American.
This morning, we’ve had the latest production updates from the two largest mining groups on the London Stock Exchange. BHP reported production numbers for its full year, showing some strong operational performances across its portfolio, with record production of some commodities such as petroleum, copper and iron ore. However, production was hampered by severe weather during parts of the year, impacting iron ore in particular. A day earlier we had the second quarter production update from Rio Tinto with production and shipments of iron ore taking a hit too from cyclone Veronica, while production outside of Australia was generally in-line with guidance.
For both companies though, iron ore is a major part of their business and they are both beneficiaries of the supply constraints that have emerged after the tragic dam collapse in Brazil, with iron prices having risen sharply and now reaching levels not seen since 2013. BHP Group, whose financial year has just ended, should report another year of sales growth with profitability returning to levels last seen around 2014. Rio Tinto, who is much more reliant on iron ore, is expected to report the strongest profitability numbers in at least five years.
Rising above the rest
When commodity prices collapsed between 2011 and 2016, the mining groups suffered disastrously because large amounts of the excess capacity were funded through debt. Following this, the sector went through a period of deep restructuring. However, we took the view that both Rio and BHP were better managed than the others, and used less leverage. The subsequent slow recovery in commodity prices has left them well positioned, making good cash flows and paying attractive dividends. The slowing global economy is a concern for the sector, but so far there is little evidence of a direct impact on both companies. For investors looking for exposure to the mining sector, we reiterate our preference for both over the others such as Glencore or Anglo American who are still highly levered.
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