COLUMN-Identical twins BHP and Rio start to differ: Clyde Russell

Mon Feb 17, 2014 11:49pm EST

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By Clyde Russell

LAUNCESTON, Australia Feb 18 (Reuters) - For the past 18 months BHP Billiton and Rio Tinto have appeared like identical twins, singing the same tune on cutting back spending, controlling costs and returning more to shareholders.

The latest financial results show the world's two biggest diversified miners are finally hitting the right notes with investors, but are diverging in style.

BHP Billiton on Tuesday posted a 31 percent rise in first-half profit to $7.76 billion, beating the median analysts' forecast of $6.93 billion.

This was achieved on the back of annualised cost savings of $4.9 billion, lower capital expenditure and higher profits from expanding iron ore output.

It was a similar story for Rio Tinto, which on Feb. 13 reported a 45 percent jump in second-half profit to $5.99 billion, exceeding the median forecast of $5.49 billion.

As with BHP, much of the boost came from cuts to capex and operating costs, with the standout performer being iron ore, which provides about 90 percent of the company's profits.

So far the story is pretty much the same. Both companies are delivering on undertakings first made in mid-2012 to slash capital spending, curtail new projects, and focus on operating costs at existing assets.

The last part of the new reality foisted on the miners by the end of the decade-long boom in commodity prices was the commitment to return more to shareholders.

It's here that they have parted ways, with Rio producing a headline-grabbing 15 percent jump in annual dividends, while BHP delivered a modest increase, but held out the promise of more in months to come.

Rio Tinto's new chief executive, Sam Walsh, said the "real proof in the pudding" was delivering more to shareholders.

The dividend was hiked to $1.92 a share, while analysts had expected $1.81.

Over at BHP, the dividend was raised by 3.5 percent to 59 U.S. cents a share, below consensus but in line with the company's practice of paying the interim dividend at the same level as the final dividend from the prior year.

Chief Executive Andrew Mackenzie said BHP was generating strong cash flows, and this would be used to cut debt from $27.1 billion to $25 billion, and at that point the company would consider returning capital to shareholders.

BHP SHAREHOLDERS STILL WAITING

This means BHP investors will have to wait at least six more months to see how much they may get, and whether it will be in the form of a dividend increase or a share buyback, or both.

Since the change in direction in mid-2012, Rio's Australian-listed shares have outperformed with a 45 percent gain from the year-low in August, beating BHP's 28 percent return since its July 2012 low.

Since the start of 2014, Rio is up 3.5 percent and BHP only 2 percent, and for both companies the gains were achieved only after the results were released.

Rio's stronger share performance is probably more of a result of the increase in iron ore, with spot Asian prices up 43 percent since their low in September 2012.

However, it's worth noting that iron ore prices are down 7.3 percent this year, showing that Rio is managing to win investor backing even though the price of its main earner is flagging.

Both Rio and BHP appear to be reaping some of the rewards of their cost-cutting and paring back of expansion plans.

But both remain vulnerable to any further slowing in demand growth from China, the world's top buyer of iron ore, copper and coal, the three commodities that are the bedrock of both BHP and Rio.

BHP's results presentation spelled it out very clearly, stating that every movement of $1 a tonne in iron ore will vary net profit after tax by $120 million, while 1 cent per pound in copper changes profit by $25 million and for coal, $1 a tonne equates to a change of $25 million.

Obviously this works for both price rises and declines, but the risks appear more skewed to the downside for iron ore and coal this year, perhaps less so for copper.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund.

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