In the current environment of the resources industry, cost-cutting and brownfield developments are popular strategies, with companies trying to improve long-term prospects. However, for the two large Australian diversified miners, BHP Billiton and Rio Tinto, Deutsche Bank believes that this is not the correct path for maximising long-term value. Analysis shows that by not pursuing extra production and growth opportunities, the companies' valuations would be 15% lower, and free cash flow and earnings would decline by 10-15% for BHP and 25-30% for Rio after 2016. A strategy of cost-cutting and seeking to restrict supply would maximise near-term cash flow and dividends but would allow smaller miners to get a foothold in the future, reducing the ultimate profitability and value of the miners. (VIEW LINK)
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