Billiton stable but still has potential

Over the long term, Billiton's shares have tended to do better than its peers and it has consistently returned capital to shareholders.

Billiton's shares on the London Stock Exchange have outperformed the FTSE mining index over the past five years, though it has dropped to around £17 from a peak of £25 two years ago. Rio Tinto has been tracking the index for the past year, though it previously outperformed it and the shares have dropped to around £27 from around £46 two years ago. Anglo American, around £14, is less than half the £34 it was in January 2011, though it has outperformed the FTSE mining index since the beginning of this year.

Billiton, Rio Tinto and Anglo American all have new chief executives who are taking a different direction from their predecessors. Until 2010, mining companies pursued expansions and acquisitions, especially in base metals and energy resources needed for urban development by Asian nations, like iron ore, copper and coal. Since last year, slowing growth in the Chinese economy and recovery in the US economy has changed expectations of what minerals will be needed in the next five years.

Core commodities

Billiton has four core commodities in its portfolio: iron ore, petroleum, copper and coal. Rio Tinto has five product groups: aluminium, energy, copper, iron ore and diamonds/minerals. Anglo has iron ore, copper and coal but also late-stage commodities like platinum and diamonds.

Cadiz Asset Management portfolio manager Matt Brenzel says Billiton should be a core holding in any diversified portfolio. Liberum Capital analyst Richard Knights prefers Rio Tinto.

Says Brenzel: "Billiton has high-quality businesses, at the low end of the cost curve and it is making the right decisions to meet investors' demands: managing capital requirements, cutting back on unnecessary capital expenditure and looking at ways to enhance returns to shareholders."

Both Billiton and Rio Tinto have announced or concluded various disposals, expected to realise about US$5bn for Billiton and about US$7bn for Rio. Anglo American's newly appointed chief executive, Mark Cutifani, is expected to present a reviewed strategy for the group at the interim results presentation in August.

Knights said in a note to clients last week that Rio's pipeline of disposals could all in theory be concluded by the second half of this year while the potential sale of Billiton's nickel, aluminium and high-cost coking coal businesses will be harder in the current market. He added Rio Tinto offers better value than Billiton, at a price:earnings ratio of 6,8 compared with Billiton's 12,1.

New projects

Billiton's chief executive Andrew Mackenzie told the Melbourne Mining Club earlier this month steady growth in commodity output was needed to grow the global middle-class. This would require mining companies to adjust their portfolios to focus on consumption-based commodities.

Both Billiton and Rio are cutting back spending on new projects. Mackenzie said Billiton's capital expenditure would decline to US$18bn next year and substantially more after that. This would maximise returns and increase free cash flow.

Rio Tinto is completing two huge projects: Oyu Tolgoi, a copper/gold mine in Mongolia, and expansion of its iron ore operations in the Pilbara in Australia. But as these reach completion, capital expenditure is expected to fall to US$13bn this year from US$17bn, chief executive Sam Walsh said.

At the Bank of America Merrill Lynch conference in Barcelona last month, Mackenzie said Billiton's competitive advantage lay in its diversified portfolio as well as markets and operations in OECD countries. In the absence of higher prices, Mackenzie said the focus would be to increase margins and returns through improving productivity.

Brenzel believes Billiton's prudent strategy is appropriate at present.

"There's a lot of uncertainty and negativity about commodities and commodity shares and there's been a general call in the past two or three years for equities to offer yield, which has also been forced on commodity shares, traditionally quite poor at capital management largely because of the long lead times on projects.

"A greater focus on yield might be at the expense of longer-term investing but the world is uncertain enough to justify holding back rather than being aggressive, at least until normal cycles reassert themselves," Brenzel says.

Source: Financial Mail via I-Net Bridge