Mark Taylor, head of basic materials with Morningstar Equity Research, recently raised his fair value estimate for BHP Billiton and lowered his estimate for Rio Tinto. Below he makes the case for investment in either company. Click on the company name to read the full Morningstar research report for that stock. Morningstar research is available to Premium subscribers.
Investment Overview (Mark Taylor, Morningstar Equity Research)
BHP Billiton (BHP) and Rio Tinto (RIO) are the largest and second-largest diversified mining companies on the planet--market capitalisations are $225 billion and $150 billion, respectively. Together they own a swath of the world's largest and lowest-cost mining assets, which are readily expandable.
Mining companies largely are producers of undifferentiated commodities--over the long run, they have been price-takers, not price- makers. But firms like BLT and RIO have gained more say with growing concentration due to takeovers and mergers and because of unprecedented demand growth from China.
The world is experiencing a sustained increase in commodity prices. The last long-cycle uptrend was born at the end of the Great Depression and driven by the rebuilding of Europe after the World Wars and the rise of Japan to economic powerhouse status. The current rise, forged on the industrialisation and urbanisation of China, the world's most populous country, began early in the final decade of the 20th century. A similar but lagged development in India could ensure that demand for staple raw materials remains elevated for far longer than traditional commodity booms.
BLT and RIO are positioned in the centre of this enviable tailwind.