The world's biggest and third biggest diversified mining companies respectively.
Recent weakness in share price might have been due to 2 main factors:
1. Jittery global equity markets over the past few weeks, primarily arising out of Wall Street, with the reporting season, rising interest rates, renewed talks about trade barriers against China (this if it happens, might have adverse impact on demand for commodities).
2. Speculation that Rio might enter the bidding for WMR. If it happens, a bidding war between BHP and Rio could ensue. Markets do not like uncertainties like this. If Rio does not bid and BHP gets to buy, prices of both BHP and Rio would likely rise, other things being equal (other things are seldom equal but economists use this term for analytical purposes).
Once these two issues are settled, whether the prices of BHP and Rio resume the upward trajectory, hinges on whether the super mining boom continues.
For fundamental analysis, BHP (7 core divisions) is trading at P/E of 11.8 FY 05 and consensus P/E 9.6 FY 06. These are not demanding P/E's because firm contracts have been signed. BHP is a very strong cash generating 'machine' this financial year and next financial year. Beyond that, it is unclear. However, the management team appears to be very good. It recently made the decision to move the FX trading room from Australia to UK, to gain better FX rates and save money.
Even though it could not get the higher than already high, iron ore prices that it wanted, I have read that it might be selling some ore into the spot LME to gain better prices instead of supplying under contract prices. This way, it has a de facto chance of getting the higher price rise that it sought.
Rio (6 core divisions) is trading at P/E of 10.4 FY 05 and consensus P/E 9.8 FY 06. Rio has not risen as much as BHP over the past 2 years because it does not have a petroleum division.
These two are giants. I hold shares in both and see more upside than downside but then again, I would say that. Otherwise, I would not hold.
The last time Australia saw a super mining boom was when Japan industrialised. Now, the world is seeing a bigger giant, China, industrialise and become the world's factory. This process has some way to go, as China is moving up the chain towards elaborately manufactured goods. There will be many more factories, infrastructure, nuclear plants (20 new ones), office buildings, warehouses, shopping centres, etc. to be built. The massive Three Gorges Dam will take up to 2009 to complete at a huge cost.
China is likely to build as much as possible to put on a display for the 2008 Olympics as a showcase to the world.
Then there is India, which is becoming the world's back office supplier. The IT centre in Bangalore is growing rapidly. Not just call centres but software programming is now streamed over the internet from all over the world. ANZ has been outsourcing some IT functions to India for a few years. NAB is just starting to do so. Some book keeping and accounting work have started to be outsourced to India from Australia around 9 months ago. India is also building many more nuclear plants.
Then there is Brazil but that is another story.
I think that demand for commodities is likely to stay strong for many years to come. Time will tell.