What's happening to two big boys – BHP Billiton and Rio Tinto ?

With the ups and downs in the mining sector in the last two years or so, these two miners have had many set-backs. Particularly, commodity price volatility, excess capacity and oversupply have been key issues, however, there has been a rebalancing in coal and iron ore markets in the recent time which somehow is supporting the miners. Many analysts have already started acknowledging Rio Tinto’s and BHP Billiton’s improving outlook. Let us now look at the latest performances by the two big boys.

BHP Billiton Limited

Divesting non core assets:BHP Billiton Limited (ASX: BHP) made a binding Sale and Purchase Agreement with Woodside Petroleum for acquisition of BHP’s Scarborough area assets in the Carnarvon Basin, placed at offshore Western Australia. The acquisition comprises a 25% interest in WA-1-R (ExxonMobil is the operator) as well as a 50% interest in WA-62-R, including Scarborough gas field. Woodside is also buying 50% interest in WA-61-R and WA-63-R which contain the Jupiter and Thebe gas fields. Woodside would operate WA-61-R, WA-62-R and WA-63-R. With this move, BHP Billiton would get US$250 million from Woodside, while getting a contingent payment of US$150 million after the positive final investment decision to develop the Scarborough field. BHP Billiton would strengthen its cash flow from these proceeds positioning the group to withstand the oil prices volatility in a better way. As per an overview of the Scarborough assets, the area comprises Scarborough, Thebe and Jupiter fields, which are forecasted to comprise a total of over 8.7 trillion cubic feet of gas resources at the 2C confidence level. Accordingly, Woodside would get hold of over 2.6 trillion cubic feet of gas resources. The group is targeting pre-emption rights and customary regulatory approvals by 2016.
 

Scarborough assets overview (Source: Company Reports)
 
Efforts to optimize portfolio: BHP Billiton is making efforts to optimize its portfolio by applying risk management processes and form new standards for its non-operated minerals joint ventures. This move comes after the group’s Samarco event wherein BHP Billiton along with Vale is reviewing operating arrangements at the Samarco joint venture. After the Samarco event in November 2015, the group is making an in-depth review of Samarco dams to confirm the structural integrity of these facilities. The group even decided to make a centralized dam management function and is pursuing technology options to enhance dam management across the portfolio. To strengthen its safety measures, the group even applied for safety reviews developed by the Canadian Dam Association for its minerals assets, which has high standards. They even initiated International Council on Mining and Metals (ICMM) into tailings management which would offer better risks related to tailings facilities. Meanwhile, BHP stock generated over 12.3% in the last three months (as of September 16, 2016).
 

Financial Results (Source: Company Reports)
 
Rio Tinto Limited

Strengthening cash flows: Rio Tinto Limited(ASX: RIO) cut its net debt levels by $0.9 billion as of June 2016 as compared to December 2015, even though they made a $1.9 billion dividend payment. Overall they cut their gross debt by over $2 billion. The group bought back over $6.0 billion of bonds while repaid $4.1 billion of Oyu Tolgoi Project Finance (OTPF) out of cash balance in H1 2016. As of June 30^th, 2016, Rio holds a cash of over $8.3 billion, positioning them to withstand the oil prices volatility. The group intends to maintain a 20-30% gearing ratio. Moreover, RIO has been boosting its cash flow via divestments and raised over US$4.7 billion from January 2013. Recently, Rio Tinto has finished the sale of its Mount Pleasant thermal coal assets to MACH Energy Australia Pty Ltd for US$220.7 million plus royalties.
 

Maintaining core assets base (Source: Company Reports)
 
Controlling costs while reporting a solid EBITDA growth:The group reported net cash from operating activities of $3.2 billion despite controlling costs by $0.6 billion. Accordingly, the net debt was cut to $12.9 billion. Rio finished two projects in 2015 and reported that they need to maintain the project IRR of greater than 15%. The group’s capital growth is focused around three key approved projects including Amrun, Oyu Tolgoi Underground and Silvergrass. Rio Tinto declared an interim dividend of USD 45 cents per share which is equal to ~US$809m on a gross basis.
 

2016 Interim Dividend (Source: Company Reports)
 
The group intends to deliver an overall dividend of at least 110 US cents per share for FY16 while maintaining an overall shareholder cash returns of 40-60% of underlying earnings through the cycle. Meanwhile, RIO maintained their 33% Group EBITDA margins for the first half of 2016. Pilbara reported an EBITDA margin of 58% while Aluminum segment delivered an operating EBITDA margin of 25%. RIO has also terminated its Management Services Agreement with Bougainville Copper Limited (which is now an independently managed Papua New Guinea company) before stipulated time. The shares of Rio Tinto surged over 8.35% in the last three months (as of September 16, 2016).
 

Cost savings since last few years (Source: Company Reports)

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