Rio Tinto (LSE:RIO) (NYSE: RIO.US) has been suffering from the mining malaise in recent years — one minute China is growing better than expected and investors buy mining shares, then the next minute the country is facing a credit crunch and people sell again.
But I reckon all that fear and uncertainty depresses prices further than is rational, and it makes Rio Tinto’s long-term growth potential more attractive right now.
Despite the gloom, forecasts for Rio’s earnings are looking pretty decent, and at around 3,200p the shares are not highly valued:
| Dec | EPS | Change | P/E | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2013 | 332p | +10% | 10.3 | 115p | +15% | 3.4% | 2.9x |
| 2014* | 351p | +6% | 9.0 | 121p | +5.2% | 3.8% | 2.9x |
| 2015* | 381p | +8% | 8.3 | 132p | +9.1% | 4.1% | 2.9x |
* forecast
Cutting costs…
One good result of a bit of a squeeze is it forces companies to re-examine where their costs are going and start paring out unnecessary expense (and that is a bugbear of mine — they should be doing it all the time).
For the year just ended in December 2013, Rio Tinto chief executive Sam Walsh said “We have […] exceeded our cost reduction targets and set production records“. That resulted in $2.3bn in cash cost savings with exploration and evaluation savings of $1 billion, both substantially exceeding targets — targets were $2bn and $750m respectively. The bottom-line result was that 10% boost to underlying earnings.
..and raising production
Metals and minerals prices have been picking up a little, though they still remain historically low. But to counter that, 2013 was a record year for the production of iron ore, bauxite and thermal coal by Rio — and with actual shipping volumes up alongside production, any fears of overproduction seem misplaced, at least for now.
During the year, Rio also announced plans to dump $3.5bn in non-core assets, selling off $2.5bn in 2013, and says it has reduced its capital expenditure levels “in 2013 and beyond“. Net debt was down too, by $1.1bn from a year previously to $18.1bn.
The 2013 dividend was lifted by 15% to 192 cents (115p) per share, with Rio saying it “reflects the sustainable growth of the business“.
China won’t stop
Over the short to medium term, at least, Rio Tinto appears to be heading for growth. But the longer term depends on things outside of the company’s control.
Will China continue to grow and need large amounts of the valuable dirt dug up by Rio Tinto? I think the answer is an obvious yes, even if there might be a bit of a cooling-off period in the meantime.
The country’s growth rate shows signs of having stabilised at around 7.7% pa — the Chinese government is targeting a rate of 7.5%, which is believes is sustainable, and that’s the kind of growth we can only dream of in the West.
