BHP (ASX:BHP) Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: ASX:RIO) are prominent players in the global iron ore market. Both companies have substantial operations and a significant presence in the mining sector, but they face challenges in the current market environment.
Iron Ore Market Dynamics The price of iron ore has seen a substantial decline from over US$140 per tonne at the beginning of 2024 to approximately US$100 per tonne. This decrease impacts both BHP and Rio Tinto, as iron ore typically represents a major portion of their annual profits.
Recent data from China reveals a contraction in manufacturing activity and a slowdown in the services sector, which could affect iron ore demand. Additionally, new steel rebar standards in China might lead to an inventory selloff, and increased supply from Australia and Brazil is influencing the supply-demand balance.
Despite these challenges, there are positive signs. Chinese authorities have pledged to enhance support measures and stabilize market confidence, focusing on boosting consumption rather than just infrastructure projects.
One notable difference between BHP and Rio Tinto is their involvement in the Simandou project. Rio Tinto holds a stake in this project, which is considered Africa’s largest mining and infrastructure initiative, boasting the world's largest untapped reserve of high-grade iron ore. This development could diversify Rio Tinto's iron ore sources and provide a competitive edge.
Expansion into Other Commodities Both BHP and Rio Tinto are expanding their portfolios to include other key commodities, particularly those critical for decarbonisation and electrification. Copper is a major focus for both companies due to its importance in the global transition to renewable energy and electric vehicles.
Rio Tinto has a significant interest in the Oyu Tolgoi copper project in Mongolia, one of the largest copper mining ventures globally. BHP has recently acquired a copper mining project and entered into a joint venture in a South American copper district.
In addition to copper, BHP is developing the Jansen potash project in Canada, while Rio Tinto is advancing the Rincon lithium project in Argentina. However, declining commodity prices have somewhat diminished the attractiveness of these projects compared to a few years ago.
Valuation Metrics For the fiscal year 2025, Rio Tinto is projected to generate US$11.8 billion in net profit after tax (NPAT) and offer a dividend of US$4.37 per share. This would place the company's valuation at 10.7 times its estimated earnings, with a potential grossed-up dividend yield of 8.1%.
BHP, on the other hand, is expected to achieve a net profit of US$12.7 billion and distribute an annual dividend of US$1.51 per share. This results in a valuation of 10.9 times its estimated earnings, with a potential grossed-up dividend yield of 7.9%.
While both BHP and Rio Tinto present valuable investment opportunities, Rio Tinto may be particularly appealing due to its slightly lower valuation and higher potential yield, alongside the promising prospects of the Simandou project.