It’s been a very tough period for investors in mining companies. Indeed, with demand from emerging markets slowing during the course of 2014, metals and commodities prices have tumbled, with iron ore being at its lowest point for five years, for instance.
This has hit the share prices of Rio Tinto (LSE: RIO), BHP Billiton (LSE: BLT) and Antofagasta (LSE: ANTO) during the course of the year and has meant they have severely underperformed a very weak FTSE 100.
This, then, could be the right time for sector consolidation and here’s why Rio Tinto, BHP Billiton and Antofagasta could all be the subject of bids and/or merger activity.
Rio Tinto
With Rio Tinto’s share price falling by 12% year-to-date, it offers tremendous value for money at current price levels – hence the recent enquiry by Glencore regarding a merger. For instance, Rio Tinto trades on a price to earnings (P/E) ratio of just 9.5, which is considerably below the FTSE 100’s P/E ratio of 13.1. Further evidence of the company’s super-low price can be seen via its dividend yield of 4.4%, which is well-covered and very high by historical standards.
In addition to being cheap, Rio Tinto continues to have the lowest cost curve in iron ore mining. This means that its margins are higher than those of its peers and, as a result, its profitability should be maximised on a relative basis. Moreover, margins have been further aided by an efficiency drive that makes Rio Tinto a leaner and more attractive business than it has ever been.
BHP Billiton
Due to its sheer size, a merger may be more appropriate for BHP Billiton. Indeed, its diversity could prove to be a major attraction for a potential partner that is seeking relative stability during a volatile and uncertain period for the sector. With its global footprint and wide range of commodity production, BHP Billiton is one of the most diversified mining companies in the world.
Furthermore, BHP is also cheap at current price levels. Evidence of this can be seen in its dividend yield of 4.6%, which is well covered, and also in its P/E ratio of 11.7. Both are hugely appealing and show that BHP Billiton remains a very enticing investment at current price levels.
Antofagasta
Antofagasta is a very different proposition to Rio Tinto or BHP Billiton. For starters, it is heavily focused on copper mining as opposed to iron ore and, furthermore, it operates mainly out of South America rather than Australia.
In addition, it trades on a much higher valuation that its two larger peers, with shares in Antofagasta currently having a P/E ratio of 14.6. However, the reason for this is better near-term prospects than Rio Tinto or BHP Billiton.
Indeed, while Rio Tinto and BHP Billiton are set to report a fall in profits in the current year (due mainly to a low iron ore price), Antofagasta is expected to deliver a rise in earnings of 12%. This puts it on a price to earnings growth (PEG) ratio of 1.2 and, when its lucrative mining operations are taken into account, means that it could be the subject of a bid approach.