This Is Why You Want to Own BHP Billiton and Rio Tinto

By Markets Fool.com

BHP Billiton Limited (ADR) and Rio Tinto Plc (ADR) are two of the largest mining companies in the world. There's some bad things that go along with that, but there's also some really good things. And right now, the good is on display in spades.

Continue Reading Below

Spare some change?
BHP and Rio are both important global producers of iron ore. Much smaller Centaurus Metals Ltd. also mines for iron ore. With companies as large as BHP and Rio, small projects don't move the needle. These giants need really big projects to push revenues and earnings higher. With a smaller company like Centaurus, however, relatively tiny projects can mean big top- and bottom-line gains. This dynamic means that when iron ore prices are heading up, smaller players are far more likely to see big share price gains.

But iron ore prices haven't been heading higher of late -- they've been falling. And that's where companies like BHP and Rio tend to shine. For starters, they are fairly diversified, so other areas of the business can help prop up results. But they are also so large, they can keep spending well after the point when smaller players are forced to stop.

For example, Centaurus has a project in Brazil that it's working on. According to an update on the project, "the Company remains confident that the Candonga Project is capable of generating positive cash-flows even at current iron ore prices." In other words, it's a good project, and Centaurus should keep working on it. Only, the release continues: "the extremely negative global market sentiment toward the iron ore sector has made it very challenging to finance the development of any new production capacity anywhere in the world."

When you cut through it, Centaurus can't get the money it needs to move forward on this project. So, small may be beautiful in an up market, but when times get tough, it can be a huge impediment.

More and more and more!
But take a look at the production coming out of BHP and Rio. The former saw a 16% increase in its iron ore production in the first nine months of its fiscal year -- a record performance. The latter witnessed a 9% production increase in the first quarter, year over year.

Continue Reading Below

In Rio's case, the "commissioning of the Nammuldi wet plant and the ramp up of Hope Downs 4" were integral to its production increase. In other words, its spending on growth projects is increasing production, exactly as intended. And there's more in the pipeline, too, with further expansion efforts in the Pilbara region of Australia set to come on line in the first half of the year.

BHP, meanwhile, specifically noted that it brought on iron ore capacity when demand and prices were heading higher. But so did competitors. The difference is that, "Despite the subsequent increase in supply side competition, [our] low-cost expansions continue to deliver attractive margins and returns through the cycle." That's why this giant continued to spend on increasing production in the face of iron ore price declines, but more importantly, it was able to come up with the money for these projects.

BHP and Rio are keeping the iron flowing. Source: Lars Lentz, via Wikimedia Commons.

Pulling back
That said, every miner is pulling back. That includes Rio and BHP, which have drastically reduced capital spending. In fact, BHP recently delayed an iron ore project that would increase throughput at one of its Australian operations because of the current market conditions. However, this isn't due to lack of funds. These giants are simply putting their dollars to work on their best projects. And that's a far cry from Centaurus having to shelve a project it really wants to do because no one will lend it any money.

When an industry is in an uptrend, almost any company looks like a winner. But when the going gets tough, the strength of the largest, most established players often shines through. And when it comes to mining, being able to fund development projects in good times and bad is vital to long-term success -- which is exactly why you should like companies like BHP and Rio Tinto. They have the financial strength to keep going when others are left begging for spending money.

The article This Is Why You Want to Own BHP Billiton and Rio Tinto originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned and wants you to know that it's harder to find a picture of a giant than you probably think. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.