BHP or RIO Tinto? Which of these 2 resources giants is the better investment and which one has upside?

BHP or Rio Tinto? Choosing between these two major miners is no easy feat. In this article, we take a brief look over both companies and make our own choice.

Who are these two companies?

Both of these companies are major mining companies that operate all over the world. BHP is the second largest ASX company, capped at A$180bn, while Rio Tinto is third at $150bn. For those who were wondering, the first company is CBA (ASX:CBA) which is just over $250bn.

Among the commonalities between BHP and Rio, these companies:

• are ahead of the ASX’s performance in the longer-term,
• Haven’t been immune from ESG scrutiny, environmental and cultural mishaps, not to mentionCost inflation and commodity fluctuations,
• Are always on the look out for new opportunities, entering into farm-in agreements with small-cap companies that own promising projects and engaging in M&A activity; and
• Are heavily exposed to macroeconomic trends and geopolitical tensions. In particular, they have fluctuated in conjunction with fortunes in the Chinese economy, with Beijing being a major iron ore customer.

How do they differ?

But where these two companies differ boils down to their commodities.

BHP’s key commodities are iron ore, metallurgical coal, and copper, accounting for 96% of revenues. It was exposed to oil and gas but sold its portfolio to Woodside (ASX:WPL) in 2022. In FY24, it made US$55.7bn in revenue and a US$7.9bn profit. These figures may seem impressive but the latter was barely a third higher than the US$21.3bn made just two years ago. due to lower commodity prices. BHP produced 1.9Mt copper, 258Mt of iron ore and 23Mt coal. Of these, iron ore derived the most revenues ($24.8bn).

Rio Tinto’s portfolio is far more diverse, but the three key commodities are iron ore, aluminium and copper. It is the first of these that is most important to the company, as it produced 331.8Mt from the Pilbara alone. On a group-wide basis, Rio made US$54bn in revenue (Roughly 50% of which was from iron ore) and a US$11.6bn profit during CY24.

Unlike its peer, Rio’s profit was up $1.5bn from the year before, due to the strong performance in its aluminium and copper divisions which made more than 50% higher EBITDA. It paid out 60% of its underlying earnings as a dividend, equating to US$4.02 per share.

BHP or Rio Tinto? Which one is the better long-term performer?

It is BHP with a 30% return in 5 years compared to Rio Tinto’s 20%.

Why is this so? This is highly debatable, although there are a few reasons why:

• BHP appears to be prioritising investment over shareholder returns (i.e. dividends). Just look at its attempts to buy Anglo American and persist despite being repeatedly rebuffed by Anglo’s management.
• BHP’s exposure to coal and nickel has particularly impacted its top and bottom lines. In its 1HY24 results, it had to write down its WA Nickel assets by US$2.5bn. To be fair, it is not the only nickel company that has had to make 10-figure write downs, but Rio has no exposure to nickel, or coal.
• Rio is unique in not just having exposure to aluminium, but having an established business. This commodity has been less volatile in the past couple of years compared to copper and iron ore, is the most common metal on Earth, and just as useful as copper, but more recyclable and lighter.

Which one has the better future?

In the short term, perhaps Rio if only because of its strong performing aluminium and copper divisions. Both BHP and Rio are covered by dozens of analysts across their multiple listings, and they all expect upside from the current prices – albeit only because of the market rout right now. But it is Rio that has the higher mean target price premium – the target is $129 compared to the $90 per share it is at now which is 43%. Meanwhile, BHP has a gap of 16% ($42 vs $36 per share).

Also add into the mix that it is the ‘cheaper’ stock at 8.7x P/E for FY25 and FY26 compared to BHP’s 10.5x P/E, and having a market cap of over A$40bn less than BHP. So even if neither stock is facing a substantially better outlook than the other, investors may lean towards Rio Tinto given everything above.

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