Miners should continue to exploit profit lode

Commodity prices have staged a steady resurgence since November that hasn’t been fully reflected in the share prices of big diversified miners. Both BHP Billiton and Rio Tinto have strong iron ore exposure and should benefit from ongoing Chinese demand for coal and iron ore, so many investors expect gains in the big resource stocks this year—while still acknowledging the sector’s vulnerability to overseas market shocks.

Both are diversified, but the article notes a slight medium‑term preference for Rio Tinto because its Pilbara ports are considered easier to expand, which could let Rio increase exposure to its iron‑ore ‘cash cow’. BHP faces very large capital spending (an outer harbour at Port Hedland estimated at more than $22 billion and further development at Olympic Dam), which may limit near‑term free cash flow compared with Rio.

BHP’s venture into shale gas is highlighted as a longer‑term, potentially slow‑paying investment because gas prices in the US are depressed. That means returns from the shale gas move may take years to materialise, adding a longer‑term risk/uncertainty for investors.

Fortescue is largely exposed to iron ore, so its performance tracks iron‑ore prices closely. With Chinese buyers paying about US$140 (A$131) while production costs are around US$50, analysts see Fortescue as a good short‑term bet—but its fortunes depend heavily on iron‑ore price levels and supply dynamics.

The article warns that last year’s prices above US$180 a tonne may never be matched again because more supply is entering the market. That increased supply could temper future price peaks and affect highly leveraged producers like Fortescue, even as demand from China remains strong.

Easier expansion of Pilbara ports (a strength cited for Rio Tinto) can allow a miner to boost iron‑ore output without massive new capital works, supporting stronger free cash flow. More free cash flow gives companies scope for share buybacks and other shareholder returns, which can be attractive to investors.

Fortescue’s founder Andrew Forrest has moved out of the chief executive’s office into a less hands‑on chairman role, and Manhattan‑based investor Leucadia National has been selling down its stake—from about 9% to below 1% after a big sell‑down on January 25. These moves may be relevant to investors assessing governance and investor confidence.

The article suggests that big diversified miners like BHP Billiton and Rio Tinto are generally safer bets than highly leveraged peers such as Fortescue, because diversification cushions them against swings. However, the sector remains vulnerable to global market turmoil, so investors should weigh both upside from recovering commodity prices and the risks of external shocks.