I used last summer’s price slump to add Rio Tinto (LSE:RIO) shares to my investment portfolio. The mining company has risen from those price levels but it’s still one of the best UK bargain stocks to buy, in my opinion.
At £59.70 per share Rio Tinto trades on a forward price-to-earnings (P/E) ratio of 9.9 times. This is comfortably below the FTSE 100 average of around 14 times.
Meanwhile the commodities colossus boasts a huge 6.6% dividend yield for 2023. It’s more than double the 3.6% average for FTSE index stocks.
3 reasons to buy
There’s a valid view that the company’s low valuation reflects the tough macroeconomic environment. Profits at cyclical companies like this are especially at risk during periods of weak growth, such as today.
This may be true. But it didn’t deter me from buying Rio Tinto stock last summer.
This is because I invest in UK shares based on what returns I can make over five-to-10 years, perhaps longer. And I believe Rio Tinto could provide shareholder profits comfortably above the FTSE 100 average over this period.
Here are three reasons why I’m excited about the company today.
#1: The commodities supercycle
Demand for metals, energy and agricultural commodities grows in line with the global population. This is a trend that goes back to pre-history. But market experts think consumption might expand particularly strongly over the next decade, delivering robust profits growth at miners like Rio Tinto.
Let me provide a couple of examples. Thanks to the green energy transition, demand for metals like aluminium, copper and cobalt is tipped to balloon. Iron ore, meanwhile, will be needed in increasing quantities for infrastructure upgrades and rapid urbanisation.
These are all commodities Rio Tinto produces from its worldwide network of mines and smelters.
#2: Entering fast-growing markets
Buying businesses with big balance sheets has an extra advantage. Mega miners like this one have the financial strength to invest heavily in exciting market opportunities when they arise.
Rio Tinto has certainly been putting its huge cash reserves to good use. In 2021 it entered the scandium market by building a scandium oxide plant in Quebec. The rare earth metal is used to build fuel cells and as an alloy in the aerospace industry.
Rio Tinto’s acquisition of the Rincon Mining lithium project in Argentina last year is also quite exciting. Demand for the battery-making material is projected to surge as electric vehicle sales shoot through the roof.
#3: World-class assets
I also think Rio Tinto’s extensive network of industry-leading assets could help it deliver market-beating returns.
These include the cutting-edge Oyu Tolgoi copper mine in Mongolia in which the firm holds a 66% stake. This is one of the world’s biggest red metal deposits and expansion here will drive yearly output from the complex to 500,000 tonnes a year.
To put this in perspective, Rio Tinto estimates this is enough to build 1,580 wind turbines or 16,400 electric cars every day.
Rio Tinto is one of my favourite holdings right. And at current prices I’m considering building my position in the mining giant.
