Barclays Capital has switched its recommendations on two blue-chip mining giants, downgrading Rio Tinto PLC (LON:RIO) to ‘equal-weight’ and upgrading BHP Billiton PLC (LON:PLC) to ‘overweight’.
In a note to clients, analysts at the high street banking group’s investment arm said: “Following 40% underperformance vs. RIO over the last 5 years, we believe the stage is now set for BHP to recover at least some of that underperformance over the next 12 months.”
READ: Rio Tinto declares record dividend and US$1bn buyback as full year profits jump 69%
They added: “Catalysts to deliver this: we expect to see BHP monetise its US shale acreage into a rising market for oil prices and shale valuations; return US$7.8bn-US$11.1bn cash proceeds to shareholders, taking BHP's total return yield to parity with RIO's (26% of market cap cumulative over next 3yrs).”
The analysts said, beyond that, they see scope for a more aggressive approach to addressing long-term equity underperformance via additional asset sales, rationing supply in iron ore and metallurgical coal to the benefit of shareholders, and proactively pursuing dual-listing unification – although BHP’s current management appear averse to the latter two options.
Finally, over the longer term, the Barclays analysts said they see BHP as far better positioned to cope with 'peak iron ore' in contrast to Rio or Vale, given its lower starting exposure and bigger, more diverse growth pipeline.