Analysts say the share prices of BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) could keep rising thanks to China.
BHP is a world-leading resources company, extracting and processing minerals (like iron ore and copper), oil and gas, and has more than 62,000 employees and contractors, primarily in Australia and the Americas.
Rio is one of world’s largest aluminium and iron ore producers, with much of its sales revenue coming from its operations in Western Australia. It also owns, fully or partly, mining projects for copper, diamonds, uranium and other minerals.
Why BHP and Rio shares could keep climbing
Credit Suisse’s Andrew Garthwaite thinks the large miners could keep climbing, according to Australian Financial Review reporting.
The European firm thinks the global industrial production slump has bottomed. Mr Garthwaite has seen a small increase of new orders of the global Purchasing Managers Index, particularly in China.
The AFR quoted Mr Garthwaite as saying: “Historically, mining has outperformed one to three months after China PMI has moved up. If global industrial production rises, historically that’s obviously good for commodity prices.”
The miners are looking more attractive these days because the sector has reduced costs, improved balance sheets and are concentrating on cash flow.
According to Mr Garthwaite, the mining sector’s free cash yield is around 11% based on current commodity prices.
Rio has been delivering huge payouts to shareholders, as well as BHP Group. If the commodity prices stay as they are then the big payouts could continue.
The main issue that could cause the positive outlook to change is if China focuses on the consumer sector rather than putting the money towards capital investments – which need resources like iron.
Whilst I can see that resource businesses might be able to outperform in the short term, they are notoriously cyclical so it might be better to own businesses that can keep growing profit no matter what commodity prices are doing. That’s why I’m interested in the three long term growth shares revealed below.
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