Is It Time to Sell BHP Billiton and Rio Tinto?

LONDON -- Two miners, two troubled share prices. BHP Billiton  (LSE: BLT  ) (NYSE: BBL  ) and Rio Tinto  (LSE: RIO  ) (NYSE: RIO  ) are down 25% and 30%, respectively, over the past two years, and 15% over three months. While stock markets have roared, these stocks have whimpered. Is now the time to sell them?

Investors in mining stocks expect volatility. Recent troubles may simply be a continuation of that trend. Both stocks surged at the end of last year, only to plunge dramatically this year. BHP Billiton's half-year results, published in February, showed a 14% drop in group revenue to $32 billion, due to lower commodity prices generally and falling Chinese iron ore demand in particular. Profits fell 43% to $5.68 billion. Yet management remained outwardly confident, predicting a 2013 economic revival and describing the long-term outlook as "robust", while hiking the dividend 3.6%.

Rio Tinto posted a $3 billion loss, its first in 18 years, against a $5.3 billion profit in 2011. Yet this was skewed by a massive $14.4 billion write-off on its aluminum assets and Mozambique coal operations. Falling commodity prices hit Rio hard, with iron ore down 24%, aluminum down 16% and copper down 10%. Revenue fell from $60.5 billion to just under $51 billion. On the plus side, markets welcomed new chief executive Sam Walsh's new cost-cutting drive, which should save $5 billion over the next two years. Loyal investors will also have been pleased with Rio's progressive 15% dividend hike.

Fragile China
China is the big worry. Its economy grew "just" 7.9% in 2012, its worst performance for 13 years. Urbanization growth is slowing. Infrastructure investment is falling. The financial system looks fragile. The latest concern, flagged up by Schroders, is an overheating housing market. All is not lost, however. Latest figures suggest GDP recovered slightly to grow at an annual rate of 8.1% in the first quarter. Sam Walsh says Rio needs 8% Chinese GDP growth in 2013. I thought that was optimistic at the time, but he may just get it. Investors should remember that BHP Billiton and Rio Tinto are large, well-diversified global companies. China is important, but it isn't the world.

Looking forwards, BHP Billiton's earnings per share (EPS) growth looks erratic, with a projected 25% drop to 30 June, followed by a forecast 27% rise in the subsequent 12 months. Recent share price falls have left it trading at a tempting nine times earnings, but be warned, forecast profits before tax is -64%. The good news is that you will get a decent reward for your patience. BHP Billiton now yields 3.9%, covered 2.9 times.

Rio's brio
Rio Tinto also looks modestly valued at nine times earnings, so again, much of the negative sentiment is in the price. Having taken the hit of some massive writedowns, the worst news may be out there. EPS should fall 22% this year, with revenues dipping around $12 billion to below £38 billion. But we should see a recovery in 2014, with EPS rallying 10% and forecast profits topping $40 billion. With management recently hiking its dividend by 15%, Rio now yields 3.6%, covered a rock solid three times.

Broker Credit Suisse has just slashed mining target prices across the board. It cut BHP Billiton from £24 to £22.50, but given its current price of £19, that isn't the end of the world. It cut Rio Tinto from £40 to £38, but that is still nicely above Rio's current share price of around £30. Of the two, Credit Suisse favors Rio, claiming it has "a clear passage to delivering volumes and improving cash flows".

Rock on
So what will I do? I bought BHP Billiton on one of its regular dips last year and I'm standing by my man. Happily, its 3.9% yield beats the FTSE 100 average of 3.5%. Commodities are a hedge against rising prices, and with central bankers riding roughshod over inflation targets, now isn't the time to sell. The time to ditch volatile, cyclical stocks such as miners is when they're top of the heap, rather than down in the dumps. Long-sighted investors may see this as a great buying opportunity. If you're bullish on global growth, Rio Tinto looks particularly tempting.

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