Comparative Analysis of BHP Billiton and Rio Tinto

This study provides a comparative analysis of BHP Billiton and Rio Tinto in terms of major shareholders, executive management, directors, compensation, equity composition, debt structure, dividend policy, mergers and restructuring. It also includes a comparative evaluation of their performance and stock valuation using Dividend Discount Model.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction..........................................................................................................................2
Major shareholders (holding at least 5% of the shares).......................................................2
Executive management of the company..............................................................................3
Directors of the company.....................................................................................................3
Compensation of directors and top executives....................................................................4
Equity composition including any new issue(s)..................................................................5
Debt structure and source(s) of debt....................................................................................5
Dividend policy...................................................................................................................5
Mergers and restructuring....................................................................................................6
Perform a comparative evaluation of the performance of the two companies....................7
Calculate the values of the stock of these two companies and compare with current
market values and make a recommendation....................................................................................7
Conclusion...........................................................................................................................8
List of Bibliography...........................................................................................................10

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Introduction
BHP Billiton is recognized as one of the leading resources company in the world. The
main operations of the company encompass the extraction of the minerals, oils and natural gases.
The present employee strength of the company has been depicted with 62,000 employees in the
Americas and Australia. The products of the company are widely sold across various markets of
Singapore and Houston, United States (BHP, 2018).
Rio Tinto is global giant with its innovative approach in developing the largest and the
best quality of mines. The present operations of the company are spread across more than 35
nations in six continents. The initiatives taken by Rio Tinto is based on associating with
customers in new markets, and with local societies (Riotinto.com, 2018). The study aims to
prepare a comparative report of both the companies by using industry average information.
Major shareholders (holding at least 5% of the shares)
Among the group of Twenty largest shareholders as at 24 August 2017, HSBC Custody
Nominees (Australia) Limited. The issued capital of the company has been depicted with
25.09%. JP Morgan Nominees Australia Limited holds 13.89% of the issued capital. Another
notable shareholders of the company can be considered with Citicorp Nominees Pty Ltd with
5.47%
Substantial shareholder of Rio Tinto is seen with BlackRock, Inc with a shareholding
percentage of 6.28%. In addition to this, Shining Prospect Pte Ltd. is considered to be most
significant shareholders with 13.10%. Some of the other noteworthy shareholders are seen with
The Vanguard Group, Inc with a total percentage of 5% and BlackRock Group is seen with
shareholding of 5.15%.

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Executive management of the company
The executive leadership of BHP Billiton is maintained with Executive Leadership Team
(ELT) who is responsible for day-to-day management of the group. This is required for
delivering the overall strategic objectives of the business. It needs to be also seen that the OM of
the company measured as per the OMC, who is responsible for controlling, directing and
planning of the activities associated to BHP Billiton. The consideration of the important aspects
by the management team has also considered the risk factors and realization of the value of the
business.
The management team at Rio Tinto has emphasized on the sustainable development of
the strong commitments pertaining to the environmental management which is required for
building string relationship of government, civil society and community links. The “critical risk
management (CRM)” has also considered the fatality of the prevention program for accessing
more than 60 sites. The management programs are also seen with promoting the mental health
awareness and fatigue management initiatives.
Directors of the company
The board of directors of BHP Billiton has been depicted in terms of the Ken MacKenzie,
who is the chairman and Independent non-executive director since 1st September 2017. Among
the non-independent directors Andrew Mackenzie was appointed as the Chief Executive Officer
on 10 May 2013. It needs to be also discussed that some of the other significant directors of the
company can be identified with Malcolm Brinded, who is the Independent Non-executive
Director of BHP Billiton. Some of the other names which are eminent in the list of Independent
Non-executive Director of the company includes Malcolm Broomhead, Anita Frew, Carolyn

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Hewson, Lindsay Maxsted, Wayne Murdy and Shriti Vadera. It needs to be further discusses that
in the group of the non-executive directors Margaret Taylor can be also depicted as Group
Company Secretary and Chairman of the Disclosure Committee(Bhp.com, 2018).
The information extracted from the annual report of Rio Tinto shows that the key
committee memberships in the list of board of directors of the company needs to be discerned
with Audit Committee, Nominations Committee, Remuneration Committee, Sustainability
Committee, Chairman’s Committee and Jan du Plessis (R, N and C). Among the list of directors
Jan du Plessis is the Chairman of the company from 5 March 2018. Some of the external
appointments of the company includes Chris Lynch (C) as the Chief financial officer. In addition
to this, Megan Clark AC (S, N and R) is the Independent non-executive director since November
2014 who is the Chairman of the Sustainability Committee. Moreover, Simon Thompson (R, A
and N) and Hon. Paul Tellier (A, R and N) is the Independent non-executive director of Rio
Tinto. In addition to this, Sam Laidlaw (N and S) is the Independent non-executive director of
Rio Tinto (Riotinto.com, 2018).
Compensation of directors and top executives
In terms of BHP Billiton, the compensation of the directors from the single total figure of
remuneration shows that Andrew Mackenzie has received 2,468 in 2013 7,988 in 2014, 4,582 in
2015, 2,241 in 2016 and 4,554 in 2017. The STI percentage of Andrew Mackenzie is seen as 57
% as on FY 2017. The STI percentage of Marius Kloppers is depicted as 47% while the LTI
percentage is inferred as 65%. The compensation and financial assistance is further seen in terms
of the development and execution of the environmental and socio-economic programs to
remediate and provide compensation for damage due to various reasons.

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In terms of RioTinto, any compensation which is provided to an executive outside the
group is seen to be forfeited as per the variable remuneration. As per the compensation report of
the company Jean-Sébastien Jacques’s total remuneration can be seen with $ 4452 in 2017. The
compensation of some of the other key personnel of the company can be clearly depicted with
Bold Baatar receiving $ 2521 and Joanne Farrell receiving $ 2139.
Equity composition including any new issue(s)
The total equity attributable to the shareholders of BHP Billiton can be seen with $
57,258 in FY 2017. There is no information available on issue of new equity by the company.
The total equity attributable to the shareholders of Rio Tinto can be identified with $
51115 in 2017. Therefore, in terms of equity composition BHP Billiton is in better position.
Debt structure and source(s) of debt
The total debt of BHP Billiton in 2017 is inferred with $ 54280. The debt composition as
per total asset can be inferred with 46.3%. The main sources in the debt structure of the company
can be inferred with Trade and other payables, Interest bearing liabilities, Other financial
liabilities, Current tax payable, Provisions and Deferred income.
The total liabilities of the company can be clearly discerned in terms $ 44611 as per the
FY 2017. The debt composition of the company can be further seen to be inferred with 46.6%.
Therefore, both the companies are considered with an equal performance in terms of debt
composition. Some of the main sources of the debt can be seen with Borrowings and other
financial liabilities, Trade and other payables, Deferred tax liabilities and Provisions including
post-retirement benefits.

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Dividend policy
The dividend policy of BHP aims to provide the relevant services for providing a
minimum of 50% of the payout associated to the underlying attributable profit. The board has
further included the relevant sources of the information associated to the dividend policy which
are seen to be depicted as per enabling stability, flexibility thereby creating the reward for the
shareholders as well including the relevant information which are seen in a more volatile
environment.
The discussion about the dividend policy of Rio Tinto is included under the relevant
discussions of Capital and liquidity risk management shows that in February 2016, three was a
progressive improvement in the dividend policy of the company. The dividend policy adopted in
February 2016 depicts that at the end of each financial year, the board was able to determine an
appropriate level of the dividends which are associated to major commodities and long-term
growth prospects. The board has further expected the long-term growth prospects of the business
in terms of varied types the provisions which are seen to be considering the overall return of 40-
50%.
Mergers and restructuring
As per the summary of the financial performance in 2017 it needs to be seen that BHP as
stated about the demerger of South 32 during FY 2015. The cash disposed as per the demerger of
South 32 can be clearly discerned as $ (586). The demerger of South 32 shows that the existing
commitment of the for the value of the shareholders can be clearly seen with the priorities which
are able to aligned with the non-core and long-term strategy. The demerger pertaining to South32
in FY2015 can be seen with IFRS 5/AASB 5 ‘Non-current Assets Held for Sale and
Discontinued Operations.

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In terms of Rio Tinto, the ability of the group to raise adequate funds pertaining to the
planned expenditure like capital growth, mergers and acquisition can be clearly seen with
mergers and acquisition made by the company. Alcoa Corporation is considered as the logical
comparator for Rio Tinto after the demerger of Alcoa Inc.
Perform a comparative evaluation of the performance of the two companies
In order to perform the comparative evaluation of both the companies the study has
considered the significant items from the annual report of the company. In this aspect Rio Tinto
has demonstrated an operating cash flow of USD 13.9 billion for recording of full year dividend
amount to USD 5.2 billion. The overall robustness in the operational performance of Rio Tinto
can be clearly inferred in terms of the mine-market productivity. Rio Tinto was able to reduce
the net debt to $ 3.8 billion in 2017.
On the other hand, BHP Billiton is seen with a total attributable profit of USD 5.9 Billion
and underlying EBITDA of 20.3 billion. In addition to this, total free cash flow of the company
can be clearly seen with an amount of USD 12.6 billion. BHP has demonstrated an improved
sense of responsibility in terms of increasing productivity related to securing accumulated
productivity gains of USD 12 billion.
Calculate the values of the stock of these two companies and compare with current market
values and make a recommendation
The computation of the valuation of the stock has been performed with the application of
Dividend Discount model. In this model, at fist the required rate of return is computed as 3.32%
for BHP Billiton and Rio Tinto as 2.93%. In order to perform the analysis with the use of DDM
we have computed the ROE of both the companies. As per this assertion it can be clearly seen

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that Rio Tinto is identified with an improved performance of 23% in compared to 10% for BHP
Billiton.
The present value of the stock can be seen as 28.29 for BHP Billiton and 22.32 for Rio
Tinto. Therefore, it can be clearly seen that the stock performance of BHP Billiton is seen with
better performance.
βa 1.21 βb 0.78
Risk Free Rate (Rf) 2.23% 2.23%
MarketReturn 3.13%
Expected market return
of Rio Tinto(Rm2) 3.13%
Required rate of return
(r1) 3.32%
Required rate of return
(r2) 2.93%
Net Income ($M) 6222 Net Income ($M) 11939
Dividends 2879 Dividends 4250
Retention Ratio (RR1) 54% Retention Ratio (RR2) 64%
Shareholder's Equity 62726 Shareholder's Equity 51115
ROE 1 10% ROE 2 23%
Growth Rate (g1) 5.33% Growth Rate (g2) 15.04%
Dividends Per Share 0.54 Dividends Per Share 2.35
D1 0.57 D2 2.70
Current Value of Stock
(P1) 28.29
Current Value of Stock
(P2) 22.32
BHP Billiton Rio Tinto
Table: Computation of Current value of Stock of BHP Billiton and Rio Tinto
(Source: As created by the Author)
Conclusion
The discourse of the Major shareholders of the company has been able to show that
HSBC Custody Nominees (Australia) Limited has been depicted with 25.09%. Shining Prospect
Pte Ltd. is considered to be most significant shareholders with 13.10% for Rio Tinto. It needs to
be also inferred that the executive leadership of BHP Billiton is maintained with Executive

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Leadership Team (ELT) who is responsible for day-to-day management of the group. This is
required for delivering the overall strategic objectives of the business. The management team at
Rio Tinto has emphasized on the sustainable development of the strong commitments pertaining
to the environmental management which is required for building string relationship of
government, civil society and community links. Compensation of directors and top executives
have shown that BHP Billiton have been seen with receiving $ 4,554 in 2017.
Furthermore, in terms of Rio Tinto, any compensation which is provided to an executive
outside the group is seen to be forfeited as per the variable remuneration. In terms of the debt
structure both the companies are considered with an equal performance in terms of debt
composition. The dividend policy of the BHP Billiton aims to provide the relevant services for
providing a minimum of 50% of the payout associated to the underlying attributable profit.

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