Bhp and Rio Tinto, the Worlds two Largest Mining Companies, with Vastly Different Strategies for Growth

In the past 23 years the world's two largest mining companies, BHP and Rio Tinto have generated profits after tax (PAT) attributable to shareholders totalling US$364.4 billion (Figure 1). In 23 years BHP has only ever reported a loss after tax attributable to shareholders for one year and Rio Tinto for just two years (Figure 1).

Source: Data compiled by MMRC

The profit after tax attributable to shareholders for these companies in 2023 was 1150% higher than in 2000 for BHP and 567% higher for Rio Tinto. That is a compound annual growth rate (CAGR) of 11.1% for BHP and 8.2% for Rio Tinto, demonstrating the significant longer-term growth, these businesses have had.

However, going forward these two mining industry heavyweights are pursuing very different strategies to continue their impressive growth profiles.

BHP – Minimal Exploration

Despite the exceptional returns in recent years, BHP has kept its exploration spend at historically low levels, indeed the three years 2023-2021 have seen the company's lowest level of exploration expense since at least the turn of the millennium (Figure 2).

Source: Data compiled by MMRC

BHP’s 2023 exploration expense of US$350 million is at the same level it was 20 years ago, however back in 2003, the company was investing 19% of attributable PAT into exploration compared to just 2.7% in 2023. BHP’s profits have grown substantially but its exploration expense has returned to historic lows.

Rio Tinto – Extensive Exploration

Rio Tinto on the other hand has experienced its highest level of exploration and evaluation expenditure in over a decade (Figure 2), with US$1.2 billion invested, the third highest level of exploration expense in a single year. Rio Tinto invested 12.2% of its PAT on exploration in 2023, which dramatically outstrips BHP’s 2.7%.

Differing Strategies

The world's two largest mining companies are adopting very different strategies as we move into the next resources Supercycle, driven by the energy transition away from fossil fuels.

BHP’s Oz Minerals Acquisition Reduced Exploration Focus

BHP’s 2023 acquisition of OZ Minerals in May 2023, demonstrates the company’s focus on a buy-and-build strategy, where it seeks to acquire mines and development projects and expand or develop them.

BHP is likely to have been planning a large aquation for some years which explains the company's reduced exploration expense 2021-2023 and the large debt reduction seen in 2022 (Figure 3).

Source: Data compiled by MMRC

The acquisition of OZ Minerals led BHP to substantially increase its net debt position, going from net cash of US$0.8 billion in 2022 to net debt of US$9.9 billion in 2023. BHP’s current balance sheet remains relatively healthy though even with this dramatic change and it is way off where it was during the debt-burdened period between 2012 and 2016, when the company’s net debt reached as high as US$33.1 billion (Figure 3).

What's Next for BHP?

BHP, in the near term, is likely to focus on the integration of the former Oz Minerals’ copper and gold assets into its portfolio and the expansion of its existing operations. The company's current net debt position is around the same level it was between 2000 and 2011 so we would not expect to see the company focus on debt reduction near-term, with net debt likely to remain between US$5 billion and US$15 billion.

BHP has guided that it expects exploration expense to remain at a similar level in 2024 while capital expenditure is expected to increase 43% to c. US$9.6 billion from US$6.7 billion in 2023.

In the medium term, BHP is likely to continue to focus more on capital investments than exploration.

What’s Next for Rio Tinto?

Rio Tinto on the other hand is focused on exploration, with a 37% increase in exploration expenditure in 2023 compared to 2022 (Figure 2).

Rio is investing not only in exploration but also in the newest and most advanced exploration technologies in the world to discover and unlock the value of new growth opportunities. This commitment is demonstrated by a 222% increase in research and development costs by Rio Tinto in 2023 to US$245 million from US$76 million in 2022.

The company has even stated that its vision is “to be the most successful explorer in the industry”, which is a world away from BHP’s buy-and-build strategy.

Rio has an Exploration Pedigree

Rio Tinto’s exploration pedigree is demonstrated by its discovery of the Winu Copper Project in the Yeneena Basin of the Paterson Province in Western Australia.

Rio initially discovered copper mineralisation at the project in December 2017 and has since advanced the project to a massive total resource base of 608 million tonnes at an average copper equivalent grade of 0.49%.

The deposit remains open at depth as well as to the north, south, and east and it is expected to continue to grow with further exploration along the deposit margins.

Conclusion

So, which strategy will prove to be the best in the medium to long term, only time will tell.

Should Rio Tinto make a series of discoveries of a similar scale to that of Winu, then perhaps the higher-risk higher-reward exploration-focused strategy will have a huge upside for the company. If no major discoveries are made, then the perhaps lower-risk and lower-value buy-and-build strategy of BHP was the best.

That said both companies have very impressive long-term share price growth rates, with Rio Tinto having a CAGR of 6.4% since 2000 and BHP 8.8% (Figure 4), so perhaps the two present a great way to gain exposure and diversification to two different business strategies within the mining sector.

Source: Yahoo Finance

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