It’s results season, and mining giants BHP Billiton (LSE: BLT) (NYSE: BBL.US) and Rio Tinto (LSE: RIO) (NYSE: RIO.US) have both delivered upbeat sets of results in the last few weeks — but which one looks the more appealing buy?
In this article, I’ll take a look at the key numbers in each firm’s results, followed by a look at what we can expect from these two global miners over the year ahead.
The results
This is how the two companies have performed over the last twelve months:
| Ratio | BHP Billiton* | Rio Tinto |
| P/E | 12.3 | 9.9 |
| Dividend yield (growth) | 3.7% (+3.5%) | 3.5% (+15%) |
| Operating margin | 38% | 14% |
| Free cash flow yield | 4.5% | 4.1% |
*BHP’s financial year ends on 30 June, so these figures are from H1 2013/14 and H2 2012/13.
Both companies have delivered on their turnaround plans over the last year, cutting both capital expenditure and debt levels. As a result, both companies’ dividends were covered by free cash flow. Although Rio’s 15% dividend growth looks more impressive than BHP’s 3.5% increase, both are expected to deliver dividend growth of around 5% increases in this year.
Perhaps more interesting is the difference between the two companies’ profitability. BHP’s 38% operating margin is nearly three times Rio’s 14%. Against this backdrop, BHP’s higher P/E rating is irrelevant — BHP can generate more than twice as much profit for every pound you invest as Rio.
Why is BHP more profitable?
Both Rio and BHP have exceptionally large and profitable iron ore businesses, and similar levels of gearing.
The explanation for BHP’s higher profit margins lies elsewhere, in its petroleum and copper divisions. These groups generate 40% of sales and enjoy an average operating margin of 38%. In contrast, Rio’s aluminium, coal and copper divisions also account for around 40% of sales, but only have an average profit margin of about 20%, which dilutes the exceptional profitability of Rio’s iron ore division.
The year ahead
Rio trades on an undemanding 2014 forecast P/E of 9.3, while BHP’s forecast P/E of 11.7 also looks cheap, considering its greater profitability.
Both companies are expected to deliver further reductions in capital expenditure and debt, while increasing production, following the recent completion of major expansion projects. Growth in iron ore, coal and aluminium production should help Rio, as should a full-year contribution from the Oyu Tolgoi copper mine.
BHP also expects near-term growth in iron ore and coal production, and more balanced portfolio and higher profitability make it my choice of miner, in today’s market.