BHP and RIO: The Last Big Spenders

Morningstar's Mark Taylor compares the investments and spending plans of Australia's diversified mining majors over the decade

Mark Taylor 24 December, 2010 | 9:42AM
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How do the spending plans of Australia's diversified mining majors stack up? BHP's (BLT) balance sheet is ungeared and Rio Tinto's (RIO) is inching closer. When looking solely on the basis of gearing BHP appeared positively miserly over the last decade--with average gearing around 33%. It would have been a starkly different picture if bids for RIO in 2008 and/or PotashCorp in 2010 had proven successful. Perhaps a picture more akin to RIO's none-too-brief flirtation with 200% gearing levels following the $38 billion Alcan acquisition in 2007. A $15 billion restoring rights issue in 2009 and non-core sell-downs have RIO on the front foot again. Not to mention extraordinarily favourable iron ore prices and top-heavy Pilbara iron ore exposure! At 66%, RIO's average gearing over the last decade is around double BHP's.

On average BHP and RIO expended the equivalent of 14%-15% of revenue on new capital investment, excluding acquisitions. The difference is BHP spent comparatively less at the beginning of the decade and more toward the end. RIO's expenditure levels halved following the Alcan acquisition and only after two years are they now back to 15% of revenue. The $15 billion entitlement issue, belt tightening, belated non-core asset sales, and strong commodity prices brought RIO back from over-indebtedness far sooner than might otherwise have been expected.

BHP delivered the superior returns on invested capital (ROIC)--25% on average over the last decade versus RIO's 18%. Only in 2006 did RIO's returns match BHP's, courtesy of high iron ore and copper prices. Alcan and poor aluminium prices erased that advantage for RIO in subsequent years.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
BHP Group PLC1,867.80 GBX-1.27Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.

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