Key points
- BHP has 555,000 Australian shareholders, and Rio Tinto has 207,000 Australian shareholders and both are considered under-valued by Australian analysts.
- But global alternatives include Brazilian Vale and Anglo-Swiss Glencore (which made a bid for Rio last year).
- Freeport-McMoRan Inc and Anglo American Plc are two other big players.
For Australian investors, investing in commodities has traditionally been concentrated in BHP Billiton and Rio Tinto, both of which are giants of the resources world.
BHP and Rio
BHP has a global production portfolio covering most major commodities, including petroleum, copper, gold, iron ore, coking coal, energy coal, aluminium and nickel – although in May, BHP shareholders will vote on the proposed spin-off that will place the aluminium, manganese, silver, base metals and South African coal businesses in a new company, South32 Limited.
Rio Tinto also has a world-class portfolio of assets in iron ore, aluminium, coal, copper, diamonds, gold, industrial minerals and uranium.
According to the most recent annual reports, BHP has 555,000 Australian shareholders, and Rio Tinto has 207,000 Australian shareholders. All shareholders in BHP will receive South32 shares if the demerger is approved.
So Australian shareholders will have improved choice of global commodities exposure if (more likely, when) the South32 demerger is approved. South32 will be Australia’s third-largest mining company, and should be valued initially at about $16 billion, easily enough to make it a constituent of the S&P/ASX 20.
Both BHP and Rio Tinto are both considered under-valued by Australian analysts. On the consensus forecasts collated by FN Arena, BHP has a consensus analysts’ price target of $35.45, implying upside of 19.1% from the current price; while analysts see Rio Tinto as reaching $72.99, or 27.4% upside on the present price. That makes the pair even more alluring for Australian investors contemplating buying the stock, as does their improving dividend profile – although they are far from being considered yield stocks.
And let’s face it, investors who are bullish on commodity producers at present are in a minority – although mining analysts might be remarkably optimistic.
The alternatives
But for those who are interested in a bet that commodity stocks are poised for a turnaround – and who want to investigate alternatives to BHP and Rio Tinto – there are definitely some viable alternatives on the global market, although each introduces to a portfolio an element of foreign exchange risk.
Let’s take a look at the companies that qualify as global peers of BHP and Rio Tinto.
I’ve used the latest consensus analysts’ forecasts provided by Bloomberg. The ‘potential upside’ is the difference between the current price and the consensus price target of the analysts covering the stock.
The Bloomberg Rating indicates the analysts’ opinions on the stock. The rating is calculated by converting each of the analysts’ current recommendations into a number from 1-5, and taking the average. It is the arithmetic mean of buy (5), hold (3), and sell (1) recommendations: the higher the number, the more bullish are the analysts.
Vale SA (Brazil)
Market cap. US$28.98 billion
Potential upside: 46.1%
Bloomberg Rating: 3.06
The obvious first cab off the rank is the archrival of the Australian pair, Brazil’s Vale, the world’s largest producer of iron ore, and third-largest mining company. Vale is also the second-largest producer of nickel, and also produces manganese, ferro-alloys, copper, bauxite, potash, kaolin, alumina and aluminium. I’ve used the price of Vale’s American Depositary Receipts (ADRs), through which non-US companies list on the New York Stock Exchange (NYSE) or the Nasdaq Stock Market, in US dollars: Vale’s ADRs represent one common share.
Glencore plc (Anglo-Swiss)
Market cap. US$53.46 billion
Potential upside: 14.2%
Bloomberg Rating: 3.61
Listed in London (I am using the London price, in pounds), Hong Kong and Johannesburg, Glencore was created from the 2013 merger between commodities trading house Glencore International and coal, copper, nickel, zinc, vanadium and ferro-chrome producer Xstrata. Glencore produces copper, zinc, lead, nickel, cobalt, ferroalloys, alumina, aluminium and iron ore, thermal coal, metallurgical coal, crude oil and agricultural commodities, and has smelting, refining and processing businesses. Glencore has operations in North America, South America, Europe, Africa, Asia and Australasia. Last year, Glencore proposed a $190 billion merger with Rio Tinto that was emphatically rejected by Rio Tinto’s board: under British law, Glencore must wait until April to make another attempt.
Freeport-McMoRan Inc. (USA)
Market cap. US$18.86 billion
Potential upside: 39.8%
Bloomberg Rating: 3.81
Headquartered in Phoenix and listed on the NYSE, Freeport is the largest copper and molybdenum producer in the world, and also produces gold and silver. Freeport owns the world’s largest gold mine, the Grasberg mine in Indonesia’s West Papua. The company has operations in North America, South America, Africa and Asia.
Anglo American plc
Market cap. US$21.71 billion
Potential upside: 20.5%
Bloomberg Rating: 3.14
Listed in London and Johannesburg, the British multi-national Anglo American is the world’s largest producer of platinum – accounting for about 40% of world output – as well as diamonds, copper, nickel, iron ore and metallurgical and thermal coal. Anglo has operations in Africa, Asia, Australasia, Europe, North America and South America.
Lundin Mining Corporation (Canada)
Market cap. US$3.60 billion
Potential upside: 38.5%
Bloomberg Rating: 4.53
Still a “junior peer” by market capitalisation, Lundin Mining is a diversified base metals mining company with operations and projects in Chile, Portugal, Sweden, Spain and the USA, producing copper, zinc, lead and nickel. The company also holds stakes in the world-class Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo and the Freeport Cobalt Oy business, which includes a cobalt refinery in Finland. Lundin is listed in Toronto and on the OMX Nordic Exchange.
Investors who want to take a portfolio approach to broadening their resources exposure could also look to the world’s three largest resources exchange-traded funds, the BGF World Mining Fund (US), the iShares MSCI Global Metals & Mining Producers ETF (US) and the SPDR S&P Metals & Mining ETF (US). Each of these is easily bought through CommSec, E*Trade, Westpac Online, nabtrade or Macquarie Prime. However, there is a high degree of cross-over between the portfolios of the first two of those ETFs – and they both hold BHP and Rio Tinto.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.