CLSA Australia reckons among global players, only BHP Billiton offers true diversification.

Compared to Rio Tinto, which will derive 77% of its calendar 2012 earnings from iron ore, the commodity will account for 38% of BHP’s earnings with petroleum and base metals contributing 28% and 21% respectively.

The broker initiated on Brazil’s Vale with a Sell recommendation and a price target of US$19 a share, describing it as a pure play iron-ore company because iron-ore and pellet productions account for 96% of 2012 earnings.

On a net present value basis, the broker’s breakdown for Vale is as follows: iron ore 67%, base metals 16%, coal 9%, fertilizers 5%, logistics and steel 2% and manganese and ferroalloys 2%.

For BHP it is: petroleum 28%, base metals, 25%, iron ore 25%, energy coal 8%, metallurgical coal 7%, diamonds and potash 3%, nickel and manganese 3% and aluminum 2%.

For Rio it is: iron ore 41%, copper 24%, energy 16%, aluminum 12% and diamonds and minerals 7%.

CLSA reckons pressure to invest in the local Brazilian steel industry will see Vale spend US$10 billion in the next six years, with another US$9 billion of planned spend in fertilizer.

“We struggle to see Vale earning more than cost of capital on these projects,” Head of Australian Resources Research Hayden Bairstow said in a note to clients, adding the Brazilian government will retain a strong influence over Vale’s growth plans as its largest shareholder.

Mr. Bairstow said negative recommendations on both Vale and Rio are influenced by his bearish outlook for iron ore prices.

“Our forecast for flat iron ore prices for the next 18 months sees Vale’s price to earnings multiple more than double while BHP’s remains largely unchanged,” he said of his long-term iron price forecast of US$70 a ton.

CLSA has an Underperform with a price target of A$70 a share on Rio Tinto and a Buy on BHP Billiton with a price target of A$45 a share.

Separately on Tuesday, Moelis & Co. sent client a high conviction report outlining their bullishness on iron ore. “We expect the price of iron ore to recover to above US$170 a ton in the next three to six months,” analyst Craig Lang said.

He reckons this will be driven by China ramping up domestic iron ore production due to lagging seaborne supply, grade degradation providing upwards pressure on prices and a progressive recovery in China’s steel production rates.

“Our supply-demand analysis suggests the seaborne market is set to remain in deficit for at least the next three years. When the seaborne market goes into ‘surplus’ in the second half of this decade, this will see only partial closure of China’s high cost domestic supply,” Mr. Lang added.

Fortescue Metals Group is the broker’s top pick and Moelis also has Buy calls on Atlas Iron, Onesteel, Mount Gibson Iron.