Michael Bailey Deputy editor

Michael has been a business journalist for 12 years. He has extensive experience editing magazines covering funds management, commercial property and the travel industry. In 2011 he won a Citi Excellence in Financial Journalism award for a BRW cover story on economic indicators.

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Buy Rio Tinto, hold BHP Billiton, experts advise

Published 27 September 2013 11:41, Updated 30 September 2013 07:25

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Buy Rio Tinto, hold BHP Billiton, experts advise

Rio Tinto enjoys the lowest global producytion costs for iron ore delivered to China.

Rio Tinto has been hailed as a better buy than BHP Billiton in new analyst reviews of the resources sector, as the long-term forecast for iron ore prices increases for the first time in over two years.

While Macquarie Private Wealth has historically favoured BHP over Rio, it says the improved long term outlook for iron ore - it now predicts the commodity will not dip below $100 a tonne - provides a greater relative benefit to Rio. The demise of Rio’s aluminium and coal businesses means its earnings are now dominated by iron ore.

Rio Tinto now enjoys the world’s lowest production costs for iron ore delivered to China, and will benefit the most into the year-end if a seasonal re-stock of iron ore from Chinese steel factories drives prices higher, Macquarie believes.

Rio is now trading at a 30 per cent discount to its net asset value, Macquarie notes, making it a better bargain than BHP trading at a 24 per cent discount to NAV.

New management is another reason to love Rio Tinto again, according to Morningstar’s resources sector head, Mathew Hodge.

“The company’s famous record for capital discipline went out the window on Tom Albanese’s watch with the disastrous Alcan acquisition and forays into exotic locales like Mozambique, Guinea and Mongolia which bring significant sovereign risk,” he says in a new quarterly overview of the sector.

“However, we feel new managing director Sam Walsh will help right the ship and return Rio Tinto to its more staid and reliable self. Like BHP Billiton, Rio Tinto’s low costs and long-life assets mean the company will be able to expand at the expense of competitors even in a less favourable commodity environment.”

One caveat on Macquarie’s preference for Rio Tinto is that its forecast assumes a 40 per cent jump in aluminium prices to over $2500 a tonne from 2019 onwards.

“If however aluminium prices were to remain at current levels going forward, we note that BHP and RIO would essentially be trading at the same discount to NAV and hence there is still little to pick between them on valuation alone.”

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