Why are Rio Tinto Shares 3.5 times dearer than BHP if BHP is the biggest company?

[CairnsInvestor]

OK I do not know anything about shares, so I'm asking this.

I see on the finance report tonight that BHP Billiton shares are $36/share; yet Rio Tinto shares are $127/share. And BHP Billiton recently wanted to buy Rio Tinto; yet Rio Tinto said that BHP undervalued their company; I can see why if their share price is 3.5 times that of BHP. I would have thought that as the biggest & maybe the most profitable mining company in the world; BHP's share price would be much higher around the $100 mark. So if Rio Tinto is a smaller company; why are their share price 3.5 times dearer?

Can someone explain this to this like I'm a 2-year-old?

 

[redsquash]

If for example,
there are 100 million shares for BHP in the market and 10 shares for Rio, which shares will likely cost the least?
The number of shares in the market is different for each company.

Plus

If BHP has good assets compared to Rio that have fantastic assets which shares will probably be more expensive.

plus

Both companies generate cash, but which company is producing more cash for every dollar spent. The biggest company isn't necessarily the most efficient.

plus
which company has borrowed the most
perhaps rio has very very low debt and BHP just has low debt,

plus

what are the future prospects of each company.

plus

is one management superior and the other just average

There are many other factors

 

[Dazz]

Lets say the "market" values BHP Billiton as a company as being worth $ 180 billion. At that point in time it may have 5 billion shares on issue. Therefore, each share will be worth $ 36 each.

Lets say the "market" values Rio as a company as being worth $ 127 billion. At that point in time it may have only 1 billion shares on issue. Therefore, each share will be worth $ 127 each.

Share price is no indication at all for how big a company is.

A company's market capitalisation (what it's worth) is simply a multiplication of ;

Number of shares on issue * Share price = Value of Company


The way the market works is it flips it around ;

Value of Company divided by Number of shares on issue = Share price


The hard part of course, with behemoths like BHP and Rio is working out exactly what they are worth as a whole. Some analysts are employed full time to study just the one company and they become the 'expert' that all other brokers feed off.

The CEO's and CFO's of the companies quickly work out who these people are and generally don't p1ss them off too much....as a published negative opinion could wipe billions off their worth.

 

[alexlee]

Put it this way, if you own one property worth $500k, are you a 'bigger investor' than the person who owns 10 x $300k properties because your property is worth more? Would the second person accept if you say I'll offer to exchange my $500k house for your portfolio and you should accept because each of your houses are worth less than mine?

Same idea. Market cap = number of shares outstanding x price.

The shareprice is only half the story.
Alex

 

[Sunfish]

BHP has 5,783 million shares outstanding

and

RIO has 1,357 million.

And it's not a given that the predator is always the bigger. Robert Holmes a'Court almost captured BHP in the '70s.

Edit: Or was that MIM?

 

[alexlee]

CI, I really suggest you start reading the business papers on a daily basis. Most of the major dailies are free on the web. While asking individual questions is useful, the bigger your knowledge base, the better you'll learn.
Alex

 

[CairnsInvestor]

Many thanks to Redsquash, Dazzling, Alex, & Sunfish for clearing that up.