BHP vs. RIO

[DandE]

Hey guys, just joined up looking to find out a few things about the stock market.

been reading the business section of the australian lately and there has been a few articles in there that have left me with questions

The article states that RIO has lesser production costs involved then BHP does, just wondering how you get those kind of facts.

Another is why LNG prices are underpinned by Oil prices?

Thanks

 

[Smurf1976]

In the markets that import LNG, much of the gas ends up being used for electricity generation (the largest single use of fuel in most countries) and some of it ends up firing factory boilers etc too.

Oil can also be used to run the exact same equipment and is also easier (cheaper) to transport and store since it's a liquid rather than a gas.

Ultimately, the only real reason anyone uses gas for major applications like power stations is if it's cheaper than oil. Go back 40 years when oil was cheap and LNG wasn't really around, and the use of fuel oil in power plants and factory boilers etc was far, far greater than the use of gas in those applications.

In short, if gas wasn't cheaper than oil then nobody would bother with all the hassle of using it. It's a lot easier to build some simple tanks and ship in the oil rather than having to ship and store LNG at -161 degrees C etc.

Due to the above, it has long been a common practice that natural gas contracts work with reference to the oil price. It's effectively a means of guaranteeing, from the customer's perspective, that switching to LNG won't result in a financial loss compared to staying with oil (bearing in mind that historically, most of the LNG market has been conversion from oil).

 

[sydboy007]

Really don't like RIO at the moment.

They are a 1 trick pony - most of their profits are from Iron Ore.

They have a humongous Aluminium albatross around their neck as well. While the Chinese are willing to churn out aluminium at less than commercial rates of return I don't see Rio getting any value from this side of their business. Further write downs for sure.

Just got to hope BHP hasn't over paid for their shale oil / gas leases. The company has a piss poor record for investments. The Bhiliton merger was a massive valuation drain for the Aussie Shareholders

Will be interesting to see if Japan is able to get rid of the linkage of LNG to oil prices. Suppose it will depend on demand and supply over the next few years.

 

[Garpal Gumnut]

Please excuse my delay in replying.

It looks as if RIO is doing catchup to BHP after the latter's stellar run.



gg

 

[Garpal Gumnut]

BHP seems to be diverging from RIO to the upside.



gg

 

[Dona Ferentes]

BHP seems to be diverging from RIO to the upside

and some chat from a fund manager...
.
[At Schroders, we] hold RIO and BHP. Both very similar in iron ore and copper. Can you share with us your current views on these stocks?

Justin Halliwell: The first thing to say is the companies have never been more similar. If you reflect back, say, 10 years ago, BHP still had the South32 assets, and they had petroleum. And in the last 10 years, they've done the South32 demerger, and they've also demerged the petroleum assets. So, now, about two-thirds of each company is iron ore. Those assets go through cycles. Sometimes the costs are a bit lower. Sometimes the profits are a bit higher. But by and large, they are identical. BHP produces a little bit more at a lower profitability, but the net dollars of profit are almost identical.

Then they both own a share in Escondida, which is the largest copper mine in the world. And so, by that stage, you're almost at three quarters of the valuation for both businesses are identical. And so, we're really arguing around the tail. They both have more copper. BHP has a bigger extra copper business than Rio. But really, the difference is coking coal for BHP versus aluminum for Rio Tinto.

And we own both, but we're underweight BHP and we're overweight Rio. One reason is our outlook for those two commodities. You can see on the chart [below], and where the prices are today, Rio's aluminum business is unquestionably one of the best in the world. It's powered by green energy. And we think over time, not only with aluminum price rising, as I mentioned earlier, but also the green energy, you're going to get either carbon getting priced into commodity prices, so the price goes even higher, or you get green credits, one or the other green premiums, one way or another, Rio's aluminum business will make a lot more money. And you can see at the moment, it's providing a 4% return on capital. Now, look at the iron ore businesses there, they're generating 60% to 70% return on capital.



Source: BHP RIO, Schroders

These iron ore businesses are making supernormal profits. And we think that has to correct. It will impact both of them. But also coking coal prices are elevated at the moment. But obviously, with the focus on decarbonisation, coking coal is the source of carbon. So, over time, that's going to have to come out of the production of steel. And therefore, as you look forwards, the demand for coking coal is not as strong as for aluminum. So, we think, well it's pretty clear that we want to be in green aluminum versus coking coal, and hence the difference in positions. And also, having said, they're so similar, Rio is a $100 billion company, BHP is $150 billion company

 

[divs4ever]

and some chat from a fund manager...
.
[At Schroders, we] hold RIO and BHP. Both very similar in iron ore and copper. Can you share with us your current views on these stocks?

Justin Halliwell: The first thing to say is the companies have never been more similar. If you reflect back, say, 10 years ago, BHP still had the South32 assets, and they had petroleum. And in the last 10 years, they've done the South32 demerger, and they've also demerged the petroleum assets. So, now, about two-thirds of each company is iron ore. Those assets go through cycles. Sometimes the costs are a bit lower. Sometimes the profits are a bit higher. But by and large, they are identical. BHP produces a little bit more at a lower profitability, but the net dollars of profit are almost identical.

Then they both own a share in Escondida, which is the largest copper mine in the world. And so, by that stage, you're almost at three quarters of the valuation for both businesses are identical. And so, we're really arguing around the tail. They both have more copper. BHP has a bigger extra copper business than Rio. But really, the difference is coking coal for BHP versus aluminum for Rio Tinto.

And we own both, but we're underweight BHP and we're overweight Rio. One reason is our outlook for those two commodities. You can see on the chart [below], and where the prices are today, Rio's aluminum business is unquestionably one of the best in the world. It's powered by green energy. And we think over time, not only with aluminum price rising, as I mentioned earlier, but also the green energy, you're going to get either carbon getting priced into commodity prices, so the price goes even higher, or you get green credits, one or the other green premiums, one way or another, Rio's aluminum business will make a lot more money. And you can see at the moment, it's providing a 4% return on capital. Now, look at the iron ore businesses there, they're generating 60% to 70% return on capital.

View attachment 162859

Source: BHP RIO, Schroders

These iron ore businesses are making supernormal profits. And we think that has to correct. It will impact both of them. But also coking coal prices are elevated at the moment. But obviously, with the focus on decarbonisation, coking coal is the source of carbon. So, over time, that's going to have to come out of the production of steel. And therefore, as you look forwards, the demand for coking coal is not as strong as for aluminum. So, we think, well it's pretty clear that we want to be in green aluminum versus coking coal, and hence the difference in positions. And also, having said, they're so similar, Rio is a $100 billion company, BHP is $150 billion company

a fly in the ointment is Glencore , now Glencore looks repeatedly at RIO with lustful eyes , IF RIO removed itself ( mining/using it for energy ) from coal , would Glencore find the acquisition compelling ( and such a take-over attempt would be a major distraction )