Monsters of Rock: Why Goldman thinks Rio is a better bet than BHP

Rio Tinto and BHP are ramping up capex significantly in the years to come
Goldman Sachs analysts say stronger production growth could see Rio’s earnings outstrip BHP’s by US$4bn by 2030
Liontown delivers $66m EBITDA in first half of production at Kathleen Valley lithium mine

We’re into the dead period of the market news cycle, after quarterly and half-year financial reports and before next month’s production updates.

That’s given analysts some room to breathe and take a bird’s eye view of the mining sector, barring some interruptions from tariff policies, inflation numbers, political congresses and commodity price movements creating a bit of flotsam and jetsam in the market.

One of those taking stock is veteran Goldman Sachs analyst Paul Young and his team down under, who continue to back Rio Tinto (ASX:RIO) over BHP (ASX:BHP) in a note this week, following on from years of praise for the number two global miners apparently superior growth profile.

It’s an interesting take in the current environment, given the focus from a gaggle of big investors on Rio’s company structure.

The London-listed miner wants to increase its penetration in the Aussie market and is facing calls to unify and dump its London listing from activist Palliser Capital, who have got a review of the structure of the company onto the agenda for its dual AGMs in the UK and Australia over the next couple months (April 3 and May 1).

Rio recently dumped considerations for a share issuance in Australia to fund its acquisition of Arcadium Lithium, opting instead for a US$9bn notes issuance.

It follows competitor BHP’s decision to collapse its dual-listed structure in 2022 and domicile solely in Australia. While one suggestion was it would make it easier to pursue scrip M&A (BHP tried and failed to do this once since with its rejected Anglo American takeover), the other consideration is value.

There are concerns that a flight of capital from London in recent years has left those stocks trading at a discount to mining stocks in New York and Australia.

Free the cash flow

The metals and mining team of Paul Young, Chris Bulgin and Matt Greene at Goldman Sachs aren’t passing comment on any of that, but they do think Rio’s production growth and free cash flow make it attractive over BHP in the coming years.

It comes as both move back into ‘investment mode’ to maintain iron ore, copper and, for Rio, lithium tonnes.

“The major diversified miners are back in investment mode, with capex set to reach 10-year highs over the medium term, though still well below the capex peaks of 2012,” Young et. al. said.

“As a result, FCF is being impacted as the miners reinvest. We have completed a deep dive into RIO & BHP’s project pipelines, which we estimate at around US$50-60bn each (excluding maintenance capex), including an upside ‘all growth’ case scenario that incorporates future growth options not in our base case.

“Despite both mining companies spending around ~US$10-11bn p.a., we expect RIO to widen the production (Cu Eq) and FCF gap over BHP over the next 5yrs; alongside valuation, this is a key reason we prefer RIO.AX over BHP.AX (both Buy-rated).”

While Rio’s production is set to grow at a copper equivalent rate of 3-4% per annum over 2025-2030, BHP’s is set to be flat, Goldman says.

“Cumulatively, we expect RIO’s Cu Eq production to grow by ~20% to the end of the decade vs BHP with almost no growth. RIO refocused on growth around 5yrs ago (Simandou, Oyu Tolgoi, lithium, Pilbara) whereas BHP’s growth is longer dated mostly due to the company’s decision to defer project studies in Chile copper 5yrs ago and also the expansion of the Olympic dam smelter in South Australia.”

That would see Rio’s EBITDA lift over 30% over 2025-2030, with BHP’s rising just 6%, which could see Rio’s EBITDA outstrip BHP’s by US$4bn or 15% by 2030, according to GS’ numbers.

It could translate into shareholder returns as well. With Rio to maintain a 60% dividend payout on Goldman’s assumptions and BHP’s at around 50% of NPAT, marking medium term dividend yields of 6-8% and 4% respectively.

BHP’s free cash could also be weighed down by a projected copper project pipeline of ~US$40bn, with a lot of spending due in the latter part of this decade. It includes extensions and enhancements in Chile and Olympic Dam in South Australia, the development of the Vicuna district in Argentina, its share of Rio’s Resolution development in Arizona and Jansen potash.

“That said, we broadly see all copper growth as reasonably high returning (IRRs) at 15-20%. We forecast BHP copper growth will accelerate from 2030E from 1.9Mt to ~2.1Mt by 2034/35E and could reach 2.4Mt with Resolution, increasing BHP’s growth in copper equivalent production from 1.0% to 1.5% p.a.,” Young, Bulgin and Greene said.

“Over the medium term though, we estimate that BHP’s copper production will decline from ~2Mt in FY25E to 1.6Mt in FY28E due to grade decline at Escondida.

“On this, we believe BHP could look to accelerate the Laguna Seca debottlenecking project, which we believe could help offset half (~150kt) of the expected ~300kt production decline from 2028-2030E. Growth projects not in our base case are Resolution and growth in the Pilbara beyond 300Mtpa (study outcomes expected sometime in CY25).”

Limber Liontown

Awakening from its slumber was Liontown Resources (ASX:LTR), which rolled out some heartening numbers from the early days of its Kathleen Valley lithium mine.

The project generate close to $66 million in EBITDA in its first half as an operating mine, with depreciation and amortisation charges, among other things, leading to a net loss after tax of just over $15.2m.

Its worth noting costs are still being capitalised, but LTR has claimed a December quarter unit operating cost of US$652/t on a 6% Li2O basis (actual costs are lower pegged to concentrate grade but so are prices), with operating cash flow in the December quarter of $16.7m. Commercial production was declared on January 1, meaning costs will no longer be capitalised from this quarter on.

Kathleen Valley produced 116,854t of spodumene concentrate grading an average of 5.26% lithia in the December half, picking up average prices on an SC6 basis of US$811/t.

They’re now around US$855/t, but that’s not really enough to move the needle for sold off lithium producers at the moment especially after a recent pullback.

For Liontown’s part, Argonaut estimates that if spot prices lift to US$950/t it would be free cash flow positive in FY26.

On an earnings call today, Liontown boss Tony Ottaviano called current lithium prices “unsustainable”, saying at current hydroxide and carbonate prices of under US$10,000/t refineries in China are not making money.

Even so, Ottaviano has been ramping up talk that the company could look for another acquisition or operation to diversify its earnings from just Kathleen Valley, one of two large new lithium mines to open in WA last year.

Not all forecast are made even, but RBC sees spodumene prices hitting US$950/t in the third quarter of the calendar year before a pullback to US$900/t in the fourth quarter, adjusting downwards from US$1000/t in the third quarter in its previous predictions.

The investment bank’s update today shows it thinks prices will rise to US$1125/t in 2026.

It doesn’t cover Liontown but cut its price target on Pilbara Minerals (ASX:PLS) by 7% to $2.80, while lifting its IGO (ASX:IGO) PT by 4% to $6. PLS was up 3.7% this morning to $1.81, while IGO was 2.6% higher at $3.94, while Liontown shares rose 2.76% to 63c.

The ASX 300 Metals and Mining index is up 0.15% over the past week.

Which ASX 300 Resources stocks have impressed and depressed?

Making gains 🚀

Syrah Resources (ASX:SYR) (graphite) +19.2%

Meteoric Resources (ASX:MEI) (rare earths) +11.3%

Vault Minerals (ASX:VAU) (gold) +10.2%

Westgold Resources (ASX:WGX) (gold) +10.1%

Eating losses 😭

Ramelius Resources (ASX:RMS) (gold) -20.3%

Nickel Industries (ASX:NIC) (nickel) -12.3%

IperionX (ASX:IPX) (titanium) -8.1

Capstone Copper Corp (ASX:CSC) (copper) -6.1%

Most gold miners moved higher this week as prices hit a new record again on Thursday on hopes lower US inflation numbers meant interest rate cuts were more likely, while Meteoric caught a bid on a major resource upgrade at the Caldeira rare earths project in Brazil.

But Ramelius Resources was a big loser, with numerous analysts trimming price targets on a long term life of mine plan for its Mt Magnet gold mine that forecasts a longer life but higher capex and lower near term production.

Nickel Industries fell sharply earlier in the week before recovering as it tried to ameliorate concerns a more punitive royalty regime proposed in Indonesia could impact the profitability of its nickel processing operations in the Southeast Asian nation.

At Stockhead, we tell it like it is. While Meteoric Resources is a Stockhead advertiser, it did not sponsor this article.