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Recently, BHP Billiton (NYSE:BHP) raised its iron ore forecast due to rising demand from steel mills in China. Iron ore shipments from Port Hedland, Australia, the biggest iron ore exporting terminal to China, jumped 43 percent year over year in October. China imported 67.83 million tons, or mt, of iron ore in October 2013. China's large-scale urbanization projects are contributing to this iron ore demand. In 2013, the Chinese government started a program that involves spending $106 billion a year over the next 10 years to relocate around 250 million people from rural to urban areas.

BHP Billiton is focusing on this opportunity by improving its production and supply chain at its iron ore mines in Western Australia. BHP Billiton's expansion project at the Jimblebar mine in the Pilbara region of Western Australia, will enable it to increase production from 217 million tons per annum, or mtpa, in June 2013 to 220 mtpa in the second quarter of fiscal year 2014, ending in December this year. In November, the company announced spending of $301 million by the second half of next year to replace its old shiploaders at its Nelson port operations with two new ones. These new shiploaders can each move 12,500 tons of metal ore per hour compared to 10,000 tons per hour from existing loaders. These new shiploaders will be commissioned in the second half of next year. Once commissioned, it will increase the export capacity from the Pilbara region as iron ore from this region is exported from Nelson port. This investment will increase the company's capacity at its Western Australia mines up to 270 mtpa.

Iron ore prices from July 2012 to June 2013 were very volatile, from a low of $99.47 per ton in September 2012 to a peak of $154.64 per ton in February 2013, with an average price of $126.13 per ton over this period. Whereas the average iron ore prices from July 2013 to October 2013 were approximately $132 per ton. Iron ore prices are expected to average $134 per ton in 2013 and $135 per ton in 2014.

BHP Billiton's profit after tax, or PAT, changes $115 million with every $1 per ton change in ore prices for the current fiscal year ending in June next year. I expect the average iron ore prices during the current fiscal year will remain above $126.13 per ton. This rise in iron ore prices, along with meeting its target production levels, will enable the company to increase its PAT for its current fiscal year.

Move by other iron ore players

Brazilian miner Vale (NYSE:VALE) also anticipates revenue growth due to rising demand for iron ore from China. In the last quarter, China contributed to 50.2 % of Vale's iron ore sales. Vale owns Carajas, the world's largest iron ore mine located in Brazil with proven reserves of 7.2 billion tons. It takes 9 days and costs $8 per ton to ship iron ore from Australia to China, while it takes six weeks and costs $20 per ton to ship iron ore from Brazil to China. In order to cut costs, Vale is planning to have a fleet of 35 Valemax ships by the end of this month. Valemax ships can hold 400,000 tons of iron ore, twice the capacity of ships used by Australian miners to ship iron ore to China. In November 2013, Vale signed a $500 million agreement with China's state-owned Shandong Shipping Corporation that will enable it to transport iron ore to China using its four Valemax ships. Under this deal, Vale delivered four Valemax ships to Shandong Shipping, which will operate those ships. Valemax will save $6 per ton on transportation, compared to smaller ships, for its iron ore shipments to China.

Assuming Vale ships 1.6 mt of iron ore from Brazil to China using its 4 Valemax ships in this quarter, which requires 6 weeks for a one-way journey, then the company can have a transportation cost saving of $9.6 million. Thus, this deal is beneficial to Vale in terms of transportation costs for its iron ore shipments to China. I expect that over the coming years Vale will benefit from using more Valemax ships to export iron ore to China, which has about 11 ports that can handle Valemax ships.

Rio Tinto (NYSE:RIO) is focusing on efficient operation through automation and productivity increase from its iron ore mines in Western Australia as it derives two-thirds of its revenue from iron ore sales. In November, the company announced its expansion plans for its Pilbara mine project. It aims to increase production capacity at its Pilbara mines from the current 290 mtpa to 360 mtpa by 2015. As a part of its automation strategy, Rio Tinto ordered 150 driverless trucks from Komatsu by 2015 for its mining operations in Pilbara region. Out of these 150 trucks, the company expects 40 trucks to be operational in Pilbara by early 2014. Rio Tinto has about 14 mines in this region, and it operates its fleet of automated trucks along with mining operations from its Operations Center in Perth, 800 miles away.

Additionally, Rio Tinto deferred the decision to develop its Koodaideri iron ore mine in Pilbara until 2016, and the decision to expand its Silvergrass Iron Ore project in Pilbara will be taken up next year. This approach of expanding its existing mines and holding decisions to develop new mines in Pilbara will save the company $3 billion from mine development. This is expected to provide Rio Tinto financial flexibility for its operations in the coming quarters.

Conclusion

I expect BHP Billiton's focus to achieve target iron ore production and rising iron ore prices due to demand from China will improve its revenue and profitability in the coming quarters. BHP Billiton has a diversified revenue mix, with half of its revenue coming from iron ore sales, whereas Rio Tinto derives two thirds of its revenue from iron ore sales. BHP Billiton also has a cost advantage in transporting iron ore to China in comparison to Vale, which will take time to replace its existing fleet with Valemax ships.

As BHP Billiton is increasing production and improving its supply chain, I expect that it will reduce its EV/EBITDA ratio. So, at current EV/EBITDA of 7.67, the company's stock is trading at an attractive rate to take a position in it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: BHP Billiton: Growing With The Chinese Demand