BHP Billiton Limited (ADR) (BHP) & Rio Tinto plc (ADR) (RIO): Is it Time to Bet on Australia?

The resilience of the Australian economy following the financial collapse of 2008 is a testament to this region’s economic stability, its strong exports and the wise decisions made by policymakers such as Glenn Stevens – the current governor of the Reserve Bank of Australia.

One way to invest in Australia is by purchasing leading companies that operate there, such as BHP Billiton Limited (ADR) (NYSE:BHP). Is it still a good time to invest in Australia? Let’s examine Australia’s progress and the future growth of its leading mining companies.

Is Australia’s economy slowing?

The recent decision of the Reserve Bank of Australia to cut the cash rate by a 0.25 percentage point to reach 2.75% — the lowest level in recent years — is a clear indication that the RBA is concerned about the future progress of this economy.

The recent rate reduction contributed to the sharp depreciation of the Aussie dollar that fell below the parity line with the US dollar for the first time since May 2012. If the RBA considers tapering the interest rate again in the near future, this could further pull down the Aussie dollar against leading currencies including Euro and US dollar. This will help leading exporters to increase their revenue from abroad.

The concerns for a slowdown are reflected in Australia’s GDP projected growth rate in 2013: the IMF estimates the real GDP growth rate will slip to an annual growth rate of 2.9% (year-over-year). In comparison, in 2012 the real GDP increased by 3.3%.

Despite these concerns, exports continue to rise: According to Australia’s trade balance report, exports of goods and services rose in the past several months and reached $25.7 billion in March (seasonally adjusted), which is 1% higher than February. A close examination reveals that the main goods that Australia exports are: metal ores and minerals (33.8% of total goods exported), and coal, coke and briquettes (15.6%). These two sectors account for nearly half of the total goods exported.

Therefore, one way to consider investing in Australia’s economy is to invest in its leading mining companies, such as BHP Billiton Limited (ADR) (NYSE:BHP) and Rio Tinto plc (ADR) (NYSE:RIO). These two giant companies mine iron ore, coal, and other metals among other commodities. But these companies haven’t done well in the stock market year-to-date: shares of BHP Billiton declined by 12.8%; shares of Rio Tinto tumbled by 22.7%. Poor performance in 2012 in terms of revenue growth and profitability at both companies may have contributed to the sharp decline in the stock prices.