If you had any doubt about the size of Rio Tinto (LSE: RIO), just search for the company using Google. Not only will you find an incredible amount of news and information about the company, but you may notice that its central website is labelled “Rio Tinto: Global home”. The word global to me signifies enormous size and scope.
So is just being big good enough? Well yes in many ways it is, especially if you are chasing dividends. Big companies and dividend yield don’t always go together, but in this case they do (5 year dividend growth: 26 per cent, Bloomberg).
The downside to Rio Tinto is that the storm clouds are gathering. And we’re not just talking about a small storm cell. We could in fact be looking at a change in seasons.
What you need to know
Rio Tinto is the world’s second largest miner. It has assets right across the globe. Over the past 10-15 years it has been a major beneficiary of the Chinese-inspired commodities and resources boom. At one point it was your classic buy-and-forget stock. Its shares would simply keep rising and rising — especially between 2005 and 2008 (the height of the Australian resources boom). It was in just about every investor’s portfolio.
The crash came over the northern hemisphere summer of 2008/2009. Rio Tinto’s share price tumbled. It then recovered in 2010 and has been trading in a broad range ever since.
The market still likes Rio, but it’s lost its mojo.
Out of the cool group
In recent times Rio Tinto has suffered from some very predictable headlines. They include falling commodities prices, project closures, asset sales, and redundancies. As recently as last month The Guardian ran a piece on what Rio is leaving behind in Arnhem Land (Australia), after its decision to close its refinery on the remote Gove peninsula. One local was reported as saying Rio Tinto came in, destroyed their land, and gave them money for it. He said he didn’t want them to come back.
Then earlier this week Rio announced another 100 jobs would go from its Kestrel mine complex, north of Emerald, in Queensland.
The big picture
You see China’s still pulling the strings. Generally speaking, economic growth in China needs to be north of 7 per cent for Australia to avoid recession. Rio Tinto would also be affected in that potential downdraft. Currently China is growing at around 7.5 per cent and that rate is considered to be stable. Still, this week has seen the price of iron ore slump to a fresh five–year low (now fetching around $US85 per metric tonne). So only but the most bullish analysts are tipping great things for Rio, while the rest of the market are still happy with its dividends and relatively stable outlook.
The thing you have to accept with a stock like Rio Tinto is that its heyday is over. What’s left is a global mining giant trying to find a new place to rest. Mind you even mid-tier miners would struggle to keep up with Rio’s current resting pace.
Remember that you can’t invest in the stock market without taking on some level or risk. I suspect the downside risk to Rio (that has the potential to damage a portfolio) is that China’s economy starts to crack under the heavy weight of its debt (particularly local government debt).
Given how prudent the People’s Republic has been to date, I think it unlikely that China’s economy will buckle under the pressure. If you are willing to wear that risk, you’ll get an extremely large diversified mining company with strong dividends in return.
