Mining has not been the bastion of the bulls. Falling commodity prices and fears about China have put downward pressure on miners and created a buying opportunity. Large miners offer dividends and more diversification than their smaller cousins. Not all large miners are worth your time, but the upper echelon is an exception.
The current market
Iron ore is a very important resource for the mining industry. Like many other commodities, China plays a big role in driving iron ore demand. Fixed investment requires steel, and steel requires iron ore.
Analysts are antsy and expect that an iron ore supply glut could exist until 2017, but it is important to remember that the big three miners control almost 70% of the global seaborne iron ore trade. This degree of market share means that they have the ability to constrict supplies to boost prices.
China
The majority of commodities are driven by China, and the nation still has room to grow. Its growth rate is falling, but its per capita GDP on a purchasing power parity basis is still less than half the per capita GDP of Japan or Korea. China's private sector lending to the private sector as a percentage of GDP places Chinese households with less debt than American or Japanese households. China has its challenges, but it is not a basket case.
In the short run commodities may fall farther, but in the long run China will need even more raw materials.
Dividends and earnings
BHP Dividend Yield (TTM) data by YCharts
Between these three major miners, BHP Billiton (BHP 0.22%) offers one of the most diversified and attractive dividends. Its petroleum, potash, and copper operations help to decrease the company's dependence on iron ore. Its diversification helps to maintain steady dividend payments, increasing from $1.66 per share in 2010 to $2.28 in 2013.
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|
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| petroleum and potash | 5,651 |
| copper | 3,622 |
| iron ore | 11,121 |
| coal | 746 |
| aluminum, manganese and nickel | 164 |
| group and unallocated items | -177 |
Data from BHP
The company is cutting away the fat and growing its oil production. In fiscal year 2013 it was able to cut $2.7 billion in cash costs. Its oil and gas liquids production increased 16% in the recent quarter thanks to strong U.S. operations. Also, its total debt-to-equity ratio of 0.48 is the lowest among the three miners examined here.
With a dividend yield above 3% and diversified operations, BHP offers a healthy dividend.
Rio Tinto (RIO 0.43%) is another major iron ore producer, but it is less diversified than BHP Billiton. It is funding a number of copper projects, but in the short term it is hoping to maintain earnings by decreasing costs. In an effort to stop wage inflation and save AUD 100 million per year, it is starting to replace train drivers with robots.
Rio Tinto's total debt to equity ratio of 0.66 is higher than BHP's, but their dividend yields are very similar. Seeing that both companies offer similar yields and BHP is more diversified, BHP is a safer buy.
| Rio Tinto first half of 2013 EBITDA (millions of $) | |
| iron ore | 7,635 |
| aluminum | 680 |
| copper | 896 |
| energy | 402 |
| diamonds and minerals | 550 |
| other | -5 |
Data from Rio Tinto
Vale S.A. (VALE 2.87%) is under a good amount of stress. Its total debt-to-equity ratio of 0.63 is close to Rio Tinto's, and its operations are very concentrated. Vale's presentation of its financial data obscures its dependence on iron ore by not breaking down its ferrous minerals EBITDA. Its latest quarterly reports show that iron ore is the largest portion of its ferrous minerals segment and provides half of the company's overall revenues, making it a major driver of the firm's earnings.
| Companhia Vale Ads Adjusted EBITDA first half of 2013 (millions of $) | |
| ferrous minerals | 9,400 |
| coal | -285 |
| base metals | 1,208 |
| fertilizer nutrients | 128 |
| logistics | 49 |
| other | -341 |
Data from Vale
To bring Vale into a more secure position, management is selling off assets and growing its copper operations. Its Salobo project continues to improve with copper recovery rates having increased from 46% in June 2012 to 84% in August 2013.
The problem for dividend investors is that Vale's dividends are not very stable. They have fluctuated between $0.28 and $1.56 over the last four years. Given Vale's debt levels, dependence on iron ore, and unstable dividends, BHP Billiton is a better option.
Final thoughts
Mining is a capital-intensive industry, and secure dividends are usually found in the larger players. BHP Billiton is one of the best options, as it is well diversified and has a low debt load. Rio Tinto and Vale Ads are still worth watching, but their operations are concentrated on iron ore and they have significant debt loads. For conservative dividend seekers, BHP offers better bang for your buck.
