* BHP more exposed to oil, coking coal
* Rio's iron ore business yields higher profit margins
* Ultra low interest rates could fuel investor interest
By Barbara Lewis
LONDON, Sept 7 The backgrounds of the leaders of
the world's top mining companies illustrate the choice facing
investors, with BHP Billiton's chief executive having worked in
the oil industry and Rio Tinto's new boss more focused on
After aggressive cost-cutting and asset sales to drive down
debt, the two mining giants are positioning themselves to
capture growth as commodity markets begin to recover from a
crash that dented company balance sheets.
French-born Jean-Sebastien Jacques has led Rio
only since July, while his counterpart at BHP
, Scotsman Andrew Mackenzie, has been in place for the
turbulent past three years.
Both men sang from the same songsheet when presenting
financial results last month.
They ruled out the reckless spending of the past that almost
led to financial ruin and promised to be safe, boring and
disciplined, buying assets only when the price was right and
maintaining the focus on lowering costs.
Rio is widely regarded as the better pick, with more
analysts rating it a "Buy" than BHP, according to Reuters data.
Rio has the advantage of having cut debt faster, while
investors have also been put off BHP by a dam burst at an iron
ore mine in Brazil last year that could lead to years of
But there are signs of a shift in sentiment as investors
weigh the two miners' exposures to different commodities.
Since the start of the year, BHP has rallied more than Rio
-- 31 percent versus 17 percent on the London stock market --
and some analysts see better potential for BHP's coking coal and
oil assets, compared with Rio's greater exposure to iron ore.
"It's pretty much a tie. Both are cautious and both have had
big failures in the past," one industry source said, speaking
on condition of anonymity. "Oil is the swing factor and that's a
fairly safe bet longer term."
Chris LaFemina, managing director at Jefferies, upgraded his
recommendation on BHP to "Buy" from "Hold" last month, having
already rated Rio a "Buy".
He cited BHP's potential to cut costs further and its bigger
exposure to coking coal and oil.
Coking coal has rallied because of demand in top consumer
China, while oil needs an output agreement from the Organization
of the Petroleum Exporting Countries to get a meaningful boost.
Frances Hudson, investment director, at Standard Life says
it is pragmatic to have exposure to at least one of the two big
miners given their heavyweight presence on the FTSE index of
leading British stocks.
Rio's market capitalisation is 43.7 billion pounds ($58.7
billion), while BHP's is almost 59 billion pounds, according to
Reuters lists Standard Life Investments as the 15th largest
investor in Rio's London-listed share. It does not appear among
the top investors in BHP, but does have a smaller stake.
Not everyone feels it is time to reinvest in the mining
companies after BHP plunged more than 40 percent last year and
Rio lost around a third of its value.
Liberum investment bank rates both Rio and BHP a "Sell".
Liberum analyst Richard Knights said BHP's Samarco Brazilian
joint venture, liable for last year's dam burst, was a small
asset for the company in financial terms. However, the concern
is that no one can rule out massive damages being awarded after
Rio has been boosted by its greater exposure to iron ore
which has rallied by around a third this year on the Dalian
Iron ore, used in making steel, results in higher profit
margins than oil because it requires less reinvestment to
maintain output, analysts say, so it provides cash to improve
Rio's balance sheet and boost dividends.
Analysts, however, question the durability of the iron ore
rally given the global oversupply.
"Rio has the best assets in iron ore and aluminium, but
those are commodities have two of the worst supply/demand
outlooks in my opinion," Knights said.
Jacques got the top job at Rio after winning praise for his
work on the Oyu Tolgoi project in Mongolia, which when completed
will be the world's third-biggest copper mine.
Known as "JS", he is the first copper man in decades to run
the company and his appointment was seen as a shift away from
Rio gets less than 10 percent of its core profit from energy
and roughly 60 percent from iron ore.
BHP's boss Mackenzie held a number of senior roles at oil
company BP, and also headed the diamond and minerals
division at Rio.
For BHP, iron ore makes up roughly 40 percent of its EBITDA
- earnings before interest, tax, depreciation and amortisation -
and oil assets around 30 percent. Coal, including thermal and
coking, accounts for some 5 percent.
BHP last month listed the swing factors that could affect
its core profit.
The firm would receive a $42 million boost for each $1
increase on the price of a tonne of coking coal.
Another dollar on the oil price would add $79 million to
EBITDA in the current financial year, while an extra $1 per
tonne for iron ore means $217 million in extra profits.
This year hard coking coal has nearly doubled, while oil has
increased roughly 25 percent.
Rio sets out its exposure differently. "Rio Tinto's exposure
to commodity prices is diversified by virtue of its broad
commodity base," it said in its results statement.
Analysts say its geographical reach takes Rio into riskier
parts of the world than BHP, which is focused on OECD countries,
giving Rio more potential to grow and broaden that base,
especially in copper.
Combined with diamonds, copper now provides some 11.5
percent of Rio's EBITDA.
Essentially flat since the start of the year, copper
has failed to match rallies elsewhere, but analysts and
executives say the laggard could become a leader.
In an interview with Reuters shortly after becoming CEO,
Jacques said he believed copper could be the first commodity to
"get out of the over-supply environment".
At the end of 2015, Rio had 252 million pounds of copper
sales provisionally priced at 217 cents per pound.
A 10 per cent change in the price of copper from provisional
prices, would increase or reduce net earnings by $36 million.
For some investors, the sluggishness of copper, regarded as
a commodity bellwether, fuels their doubts about further gains
even if low interest rates have renewed interest in miners.
Roger Jones, head of equities at London and Capital, said he
believed investors had limited their exposure to the mining
sector for the last few years "but the magnitude of the
underweight has been reduced".
London and Capital, which has around $3.2 billion of assets
under management, does not hold share in either Rio or BHP.
"In our view, both share prices are assuming a strong
recovery in end markets which we believe is unlikely as current
commodity markets are likely to move sideways at best over the
medium term," he said.
($1 = 0.7442 pounds)
(additional reporting by Pratima Desai; Editing by Keith Weir)