Future thinking should be shared. With that in mind our team publishes insights weekly to help keep you in the (k)now.


Hewison Private Wealth - Insights
Hewison Insights

Are BHP & Rio Tinto still worthwhile investments?

Andrew Hewison
Managing Director
15 Sep 2014

Opinions are divided about the future prospects for the big miners, BHP and Rio Tinto (RIO). The performance of both has been patchy over the last few years, as the market tries to understand the implications of a slowing Chinese economy and potential lower demand for Australian Iron Ore.

The price of iron ore has decreased by 40 per cent this calendar year. Most point the finger at decreasing demand in China due to slowing growth in the Chinese property market. Another reason came from the big three global miners – Vale, BHP and RIO. These companies  depend heavily on iron ore for their profitability, as they drastically increased production (two thirds of which heads to China) and shipping volumes in 2014.

The big issue is the cost a miner incurs to produce a tonne of iron ore. BHP and RIO are essentially the lowest cost producers of iron ore in the world, with margins up around 60 per cent on what it costs them to extract it from the ground when compared to the selling cost. This ensures that even when the cost of iron ore  falls significantly, not only can the big miners remain profitable; they also have the option of ramping up production to maintain their profit margins.

This action has caused an oversupply but it has also costed out many of the higher cost producers in the marketplace, as they struggle to turn a profit when the iron ore price falls. For example, since the start of the calendar year BHP has fallen 6 per cent and RIO 10 per cent. However, the higher cost producers have been hit much harder, such as Atlas Iron at 50 per cent and Fortescue Metals at 31 per cent.

In summary, yes, there is volatility in the market place as investors continue to gauge China’s future need for commodities.

On the basis of the issues discussed, I would not be too quick to discount of the larger miners such as BHP and RIO to continue growing their profits. Their low cost assets place them in the box seat to adjust their strategies in the wake of volatile commodity prices.

Also consider the fact that these “growth” assets now pay handsome dividends. BHP distributes a gross yield of around 5.5 per cent and RIO around 5 per cent.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.