Top three miners in the world was on fire. Vale, BHP Billiton and Rio Tinto generate operating cash flow of USD 62.6bn during 2010

As Des Kilalea of RBC Capital Markets puts it, “the reconstruction of Japan will benefit many infrastructure materials in the medium term”. For now the focus is on assessing the extent of damage to the country, following crippling natural disasters. Looking beyond the short-term, mining investment programmes could well remain unchanged, not least given the long term views built into approvals.

The pace and extent of mining capital expenditure budgets expanded significantly during 2010; 2009 had been a wound-licking year after the 2008 credit markets crisis. For the market leaders, capital expenditure during 2010 exceeded the peak seen in 2008.

BHP Billiton, Vale, and Rio Tinto produced aggregate operating cash flow of USD 62.6bn during 2010, setting all kinds of records, and underpinning some of the world’s biggest market capitalisations (values). BHP Billiton, the world’s biggest diversified resources stock (it is also in the oil business), led the pack, with operating cash flow of USD 24.7bn, underpinning a market value of USD 220bn.

Investors want growth, and these stocks are delivering. BHP Billiton spent nearly USD 10bn on capital expenditure during 2010; deducted from operating cash flow, this left the group with USD 14.8bn in free cash flow.


USD m 2010 2009 2008 2007
Operating cash flow 62,591 27,585 55,380 35,942
Capital expenditure -27,122 -22,237 -26,696 -19,442
Free cash flow 35,469 5,348 28,684 16,500
* BHP Billiton, Vale, Rio Tinto

Investors also demand cash when it is flowing this freely; here, BHP Billiton recently announced an expanded capital management programme (share buy backs) of USD 10bn, scheduled to be complete by the end of 2011. This is nothing new: over the past five years, the group has bought back USD 12bn worth of its own stock, and paid shareholders just over USD 18bn in cash dividends.

BHP Billiton’s muscle can be compared to Exxon Mobil, the world’s most valuable listed stock of any kind, at USD 409bn. During 2010, ExxonMobil produced USD 19.5bn in free cash flow (compared to BHP Billiton’s USD 14.8bn). Given BHP Billiton’s diversification, this suggests either that ExxonMobil could be overvalued, or that BHP Billiton could be undervalued. And the oil business does not look the same as BHP Billiton going, big time, into potash.

For BHP Billiton, Vale and Rio Tinto, the key common cash-flow denominator is unquestionably seaborne iron ore. The three dominate the global trade, where prices are set by the cost of the final tonne of iron ore produced by the highest-cost producer. Demand is overwhelmingly driven by China, not only the world’s biggest steel producer, but also a country where over the past decade domestic iron ore output has contracted, giving external iron ore miners a double whammy, as China turned into an iron ore importer.

China’s overall high rates of growth could continue for another two decades. BHP Billiton alone has earmarked USD 80bn worth of capital expenditure over the next five years. Vale is advertising leading global mining capital expenditure during 2011, with a budget of USD 24bn (compared to USD 12.7bn in 2010). Vale anticipates that this year’s global mining capital expenditure “is very likely to surpass” the peak of USD 120bn reached in 2008.

USD m 2010 2009
Ferrous minerals 23,976 8,395
Coal 21 -1
Base metals 2,294 1,159
Fertilizer nutrients 176 255
Logistics 345 295
Others -696 -938
Total 26,116 9,165
Source: Vale

Vale has some things to prove. Despite significant corporate activity over the past five years, starting with hefty acquisitions in nickel in 2006, Vale has yet to demonstrably diversify its earnings stream beyond the absolutely astonishing capabilities of its iron ore division. The emphasis over the next five years targets a stupendous increase in iron ore output, along with significant increases in output of nickel, copper, coal, potash and phosphate rock.

Vale, ’000 tonnes 2011e 2015f Change
Iron ore 311,000 522,000 67.8%
Nickel 295 381 29.2%
Copper 332 691 108.1%
Coal 11,600 42,000 262.1%
Potash 800 3,400 325.0%
Phosphate 6,400 12,700 98.4%

Rio Tinto, which is yet to banish the ghost of spending USD 37bn in cash on the Alcan acquisition in 2007, reported a significant comeback in 2010. The overall aluminium division, however, contributed just USD 733m to underlying earnings. This could seem tragic, considering that Rio Tinto already operated a big aluminium business before it pounced on Alcan, outbidding at least one potential rival.

Rio Tinto has approved USD 12bn of major capital projects since the start of 2010. This includes what Rio Tinto describes as “Australia’s largest fully integrated mining project through the expansion of our iron ore business in the Pilbara towards 283m tonnes a year by 2013, and continue to finalise studies into the phase two expansion to 333m tonnes a year by 2015″.

Rio Tinto’s numbers for 2010 show that the group also relied heavily on its existing iron ore division. Copper contributed well; after iron ore, copper ranks as one of the world’s most profitable minerals, along with coking coal, a business globally dominated by BHP Billiton.

Rio Tinto

Underlying earnings
USD m 2010 2009 2008
Iron ore 10,189 4,126 6,017
Aluminium 733 -560 1,237
Copper 2,534 1,878 1,597
Energy 1,187 1,167 2,581
Diamonds & minerals 328 800 474
Other -984 -1,113 -1,603

13,987 6,298 10,303

As an essential ingredient in iron ore reduction, coking coal’s fortunes are largely tied into the steel cycle. BHP Billiton’s heftiest earnings contributors can be identified as iron ore, its high-margin oil business, coking coal and copper. Along with its other divisions, the group’s diversification is likely to remain supreme for the foreseeable future.

BHP Billiton, financial year to 30 June

Underlying earnings before interest, depreciation & tax
USD m 2010 2009 2008 2007
Oil & gas 4,573 4,085 5,485 3,014
Aluminium 406 192 1,465 1,856
Base metals 4,632 1,292 7,989 6,875
Diamonds/other 485 145 189 197
Nickel 668 -854 1,275 3,675
Iron ore 6,001 6,229 4,631 2,728
Manganese 712 1,349 1,644 253
Coking coal 2,053 4,711 937 1,247
Steam coal 730 1,460 1,057 481
Other -541 -395 -390 -259
Total 19,719 18,214 24,282 20,067
Some big miners

Stock From From Value

price high* low* USD bn
BHP Billiton GBP 21.99 -16.9% 31.0% 220.18
Vale USD 32.44 -12.9% 38.1% 171.57
Rio Tinto GBP 38.34 -18.7% 39.3% 126.91
Shenhua CNY 26.69 -13.6% 30.8% 66.97
Suncor CAD 42.09 -11.0% 40.7% 66.60
Anglo American GBP 29.47 -15.0% 32.3% 63.33
Xstrata GBP 12.94 -18.1% 55.4% 61.38
Barrick USD 51.00 -8.5% 39.0% 50.93
Coal India INR 338.45 -5.4% 38.1% 47.19
Freeport-McMoRan USD 48.93 -20.2% 74.1% 46.31
* 12-month


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