Why one bank is switching its allegiance from BHP Billiton to Rio Tinto

 
Suzie Neuwirth
(Source: Rio Tinto)

As both are FTSE 100 listed Anglo-Australian miners, BHP Billiton and Rio Tinto often get compared rather than contrasted.

But RBC Capital Markets today downgraded BHP – despite the stock outperforming Rio by around 10 per cent this year – and switched to a preference of Rio over BHP.

“Since December 2013 we have preferred to hold BHP Billiton exposure over Rio Tinto. However, with iron ore prices approaching what we think could be a second quarter of 2014 bottom, we are switching to a preference of Rio Tinto over BHP,” said Timothy Huff, analyst at RBC.

A slowdown in growth in China, the world’s largest consumer of commodities, has pushed down prices across the sector, with iron ore particularly badly hit due to a glut in supply. But RBC expects this to change.

Mining giants such as Rio and BHP have been increasing their iron ore operations, in order to cut costs through economies of scale and hopefully see off smaller competition.

Both firms have sizeable iron ore operations but Rio’s is a larger proportion of its business, equating to around 40 per cent of revenues compared to BHP’s 30 per cent.

RBC has slightly cut its price target on Rio Tinto to £37 per share from £38 per share, but lowered its price target on BHP by five per cent to £20 per share.

“Over the past week Rio has traded in the £30-31/sh range, which we consider to be the ideal buying level for Rio in 2014. We now prefer Rio over BHP for the second half of 2014 as we expect the incremental monthly iron ore surpluses to start to ease from July and throughout the second half,” said Huff.

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