Evidence continues to mount that the worst of a three-year downturn is fading for the mining industry with the world's second biggest miner, Rio Tinto Rio Tinto, last week reporting better than expected mineral production for the June quarter, and the world's biggest miner, BHP Billiton BHP Billiton, expected to match its arch-rival when delivering its June quarter report tomorrow (July 23).
Both companies have become heavily reliant on Chinese demand for iron ore but the highlight of Rio Tinto's output for the three months to June 30 was a 5% increase in copper production, a performance BHP Billiton is expected to match as both companies rotate their focus away from iron ore to other assets in their diversified portfolios.
Rio Tinto's expanded rate of copper production impressed analysts at the investment bank, J.P. Morgan J.P. Morgan, which noted that the company had revised upward its guidance for the 2014 calendar year with output of refined copper expected to rise by 15% to 300,000 tons.
Rio Tinto Rated A Better Investment
Like a number of other investment banks, J.P. Morgan rates Rio Tinto as a better investment at its current share price than BHP Billiton though its is interesting that of eight banks surveyed all have the big two of world mining on their buy lists or, at worst, assigned a neutral rating. None say sell.
What analysts seem to like about the diversified miners is their ability to replace a fading star, which is iron ore, with alternative divisions, such as copper.
Rio Tinto reported that in the June quarter it achieved productivity gains across its business through a combination of increased production volumes and cost cutting. Those improvements are expected to be revealed in the company's half-year financial statement scheduled for release on August 7.
BHP Billiton's June quarter is tipped to surprise on the upside with the investment bank, UBS UBS, telling clients yesterday that the key areas to watch will be iron ore and coal.
Rising Output And Cost Cutting Are The Drivers
While production rates of minerals, and oil in the case of BHP Billiton, are being maintained or expanded the primary driver of financial performance appears to be productivity improvements which seem likely to see both companies maintain profits and potentially increase dividend payouts despite the ongoing weakness in the price of some minerals.
J.P. Morgan expects Rio Tinto to suffer a small decline in profit before tax, depreciation and other charges in its December 31 year with earnings down by 6.5% from $19.4 billion in 2013 to a forecast $18.2 billion this year, but with shareholders receiving dividends up 6% from $1.98 to $2.10. Profit and dividend growth are expected to continue in later years.
BHP Billiton should do better than Rio Tinto, though a direct comparison is complicated by its financial year ending on June 30. UBS estimates that when the big miner files its financial results on August 19 it will feature a very modest 2% increase in pre-tax earnings at $23.4 billion, matched with a 3.5% increase in dividends for the year with last year's $1.16 a share topped by a payout of $1.20 for the latest year.
Strong cash flows are also being directed to debt retirement with BHP Billiton tipped to be debt free by 2017, a significant change on the $27.5 billion net debt position at June 30 last year.
Smaller Companies Dropping Out
The outlook for both companies is strong with increased productivity starting to be boosted by slightly higher commodity prices as demand for raw materials picks up, particularly in Asia, and rival miners struggle to develop projects thanks to a shortage of risk capital.
For the big two of world mining the next few years could be a time to cement their leadership roles as smaller companies drop away either because their production costs are too high, or they cannot raise fresh debt or equity.
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