High-quality resources support above-average returns for 
BHP Billiton (BHP) and Rio Tinto (RIO) compared with the resource industry generally and the more select group of diversified global mining peers. Both companies are attractive investment propositions and are well placed to generate excess returns on average for at least a decade to come. Both BHP and Rio have large portfolios of long-lived, low-cost mines assembled throughout many decades. Operations include world-class hubs in iron ore, copper, coal, aluminium and, in BHP's case, petroleum. Many of these are effectively irreplaceable, with low sovereign risk and proximity to key Asian markets. For the replicable assets, often the capital cost is multiples of that BHP and Rio originally paid, with Pilbara iron ore a good example.
Both companies' earnings are heavily skewed to iron ore, Rio particularly so given the failed diversification with the 2007 Alcan purchase. We expect a more even distribution of product contributions for both BHP and Rio as the China-driven skew to iron ore unwinds. Improving margins and stronger earnings overall will allow Rio's dividends to grow in line with those of BHP. However, Rio will remain skewed to iron ore and overall margins and returns will continue to lag those of BHP. Both are world-class miners, with BHP the higher quality despite Rio being more attractively priced at present.
BHP was the clear winner in the last decade. BHP outclassed Rio on numerous financial metrics, producing a total 45%, or $72.2 billion, more in earnings before interest, tax, depreciation and amortisation (a measure known as EBITDA) than Rio to June 2013 from a similar starting base. It achieved this at higher average margins and returns on capital while maintaining a more balanced asset portfolio and lower average gearing. This allowed BHP to pay out twice as much in dividends, after adjusting for net share issues and differences in the starting capital base. The performance largely reflects BHP's favourable petroleum move, in contrast to Rio's woeful Alcan move which it is unlikely to repeat.
Rio's earnings should keep pace with those of BHP but its legacy mix weighs on returns. We forecast nominal EBITDA increases of near 40% for both groups by 2018, higher for Rio given expected aluminium price improvement. We expect BHP's EBITDA margin growth to be superior due to growing earnings from high-margin petroleum, and the lesser relative weighting to declining, but still high, iron ore margins. We think BHP will continue to enjoy superior returns on invested capital, or ROIC, our numbers portending a 400 basis point rise for BHP to 16% by calendar 2018 compared with a 300 basis point increase for Rio to 13%. Rio's future returns are diluted by low-margin aluminium which lessens its appeal.
These two high-quality miners are well placed to deliver attractive returns though Rio is higher risk. Iron ore is relatively more important to Rio and, while we expect aluminium will become Rio's second-largest earnings contributor, it will remain a lower-margin business relative to installed capital. Further, a rise in oil price would reduce Rio's fair value while BHP's oil division hedges against this. Heightened fair value sensitivity in Rio again detracts from its relative appeal, but at £30, a 15% discount to our £42.50 fair value estimate, Rio is marginally cheaper with BHP's £17.84 a lesser 10% discount to our fair value estimate of £26.65.
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