BHP and RIO doing what's best for shareholders


Published in the Daily Telegraph, June 2015 by Dale Gillham

If you are a shareholder you probably like companies that increase productivity, reduce costs and ultimately support their share price.

So why are our big iron ore miners BHP Billiton and Rio Tinto being criticised?

Where do we draw the line between what’s good for BHP and Rio and what’s good for the economy.

Remember, BHP and Rio’s boards must operate in the best interests of their shareholders, which I believe they are doing.

Companies that have failed to act, or have not had the resources to achieve the sorts of savings and productivity gains the big miners have, will be exposed to market forces.

Smaller operators have struggled, but is not a new phenomenon and not confined to commodities.

When big retailers move in, smaller retailers may end up closing.

With iron ore, price is also critical, so without intervention smaller iron ore miners will struggle or, worse, fail.

Smaller miners say that the strategy taken by BHP and Rio to push out more production helped to accelerate the decline in the iron ore price, which fell from an alltime high of $US187 per tonne in 2011 to below $US47 this
year.

But what choice did BHP and Rio really have?

My analysis indicates that iron ore has the potential to rise to at least $US70 per tonne before it turns down again, in around November-December 2015 or February-March 2016.

However, if demand for ore doesn’t support higher prices — and BHP and Rio keep pumping it out — we could see the price sink to $US31 to $US33 in 2016. BHP and Rio boards have been fighting to support their share prices, and so far their strategy appears to be working.

But if iron ore fulfils my worst-case scenario, BHP and Rio may experience another drop before what I expect to be a quick recovery at the end of the commodities slump in around 2017-2018.

As an analyst and trader, I’m not focused on the debate, but more on what BHP, Rio and the iron ore charts show, as price charts speak a thousand words. \

With this knowledge you can lower your risk.


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