Anyone with investments in mining major Rio Tinto (LSE: RIO), could be feeling a bit nervous these days. The stock has seen some rocky times in the past few months, with share prices remaining at sub-4,000p levels since August 1, when its half-year results came in below analysts’ expectations. Added to this is the pessimistic outlook for metal prices in 2019 and 2020. The International Monetary Fund (IMF) expects its commodity metals price index to decline in both years, which is a big negative for this multi-metal miner.
Despite these predictions, however, I believe that there is still much merit in commodity companies. In the past, I have made a case for investing in multi-commodity miner, Anglo American. Here I extend the argument to Rio Tinto. A closer look at the company’s trends, as well as the broader forecasts for the industry, suggests that there are at least four good reasons to buy into the Rio Tinto story today.
Caught under the wheels
First, while there is little denying that the share price might have responded negatively to that half-year results disappointment, I believe any fears around that are overblown. Its share price gyrations are closely in sync with movements in the FTSE 100, which suggests that it was hammered primarily because of the broader market meltdown rather than due to fundamental issues with the company’s business.
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Healthy financial results
Next, I don’t think the results were at all bad, with growth in both the top line and bottom line. It reported a rise of 6.6% in revenues from all product groups for the half year to June 30. The company’s iron ore operations, which contribute almost half of its revenue, also grew by 4.6% and this product group saw a roughly1% increase in earnings before interest, taxation, depreciation and amortisation (EBITDA), despite a softening in iron ore prices.
Softening iron ore prices have not held back the increase in EBITDA and in the half-year results, the company talked about “cash cost savings and productivity improvements” fully offsetting the impact of lower prices. This gives me confidence in its ability to keep its costs under control, even when the external scenario is not favourable. This point is especially relevant in light of the fact that iron ore prices are expected to decline in the next two years.
Diversified product range
Third, it is worth noting that while the overall metals’ price forecast is trending downwards, and that is certainly true for iron ore, aluminium and copper are expected to show price increases. Together, these two segments, along with diamonds, contribute as much to Rio Tinto’s revenues as iron ore. Therefore, it is reasonable to assume that even if the latter is dented by falling prices, other segments could make up for it, or at least could help to steady the ship.
Macro hedge
Lastly, for UK-based investors, stocks of international companies like Rio Tinto can be particularly attractive since its fortunes don’t depend on this economy and its Brexit-driven turbulence. The fact that Rio Tinto’s largest revenue share comes from China, followed by other Asian countries and the USA, puts the level of diversification into perspective. The company can of course take a cyclical beating, but I believe it’s a solid one to hold on to for the long-term investor.
