SWOT Analysis of Rio Tinto and BHP Billiton

11/15/2013 11:00 am EST

Focus: COMMODITIES

What are the most important factors affecting companies in the mining industry today? David O'Hara of The Motley Fool UK, highlights the strengths, weaknesses, opportunities, and threats affecting these two mining giants.

Rio Tinto

Rio Tinto (LSS: RIO) (NY:RIO) has a £65bn market capitalization, making it the 24th largest UK-listed company.

Strengths

Rio's greatest strength is its history and track record. This helps provide considerable assurance to any authority considering applications for mining licenses.

Weaknesses

Rio Tinto is what economists call a "price taker." It has no influence on the price of products that it produces. This brings extra risk to its profits, and limits the rating that the market will award the shares.

Opportunities

Last month, Rio Tinto sold its stake in the Clermont mine for over $1bn. This was part of a strategy to concentrate its operations on larger mines. The divestment will enable the company to dedicate more management time to higher margin activities. Further disposals could provide more help to increase profitability.

Threats

As a price taker, Rio Tinto is vulnerable to changes in the global economy. The shares have fallen back in the last couple of years amid fears for the Chinese economy. If China does stumble, Rio Tinto's profits could fall hard.

BHP Billiton

BHP Billiton (LSS:BLT) (NY:BBL) is significantly larger than Rio and is the tenth largest company in the FTSE 100.

Strengths

BHP's key strength is its diversity. No single commodity is responsible for more than one third of BHP revenues. While iron ore is its biggest product by revenue, a similar contribution is made by coal, copper, and petroleum/potash—each is responsible for around one sixth of all sales.

Weaknesses

Like Rio Tinto, BHP Billiton trades in volatile commodities markets. This makes financial management more difficult, as the company has little certainty over its future cash flows.

Opportunities

Although much media attention is dedicated to the troubles of European economies, emerging economies are growing fast. The industry expects that within a decade, African economies could become significant consumers of metals. A new source of demand will be welcomed by an industry that has become dependent on Chinese appetite.

Threats

Major miners are all at risk of increased government regulation. A change in the rules can quickly undermine the economic case for extraction. Energy prices can also move fast and have a material impact on margins.

It appears that there is little to choose between the companies. If I wanted to get some mining exposure in my portfolio, I would likely buy both.

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