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Why Rio Tinto plc Should Be A Winner Next Year

I’m taking a tour of some top companies in the FTSE 100 and looking at how well the City folk think they’re going to do in 2014 — and I’m offering my take in it.

Today it’s time for one of our diggers and delvers, Rio Tinto (LSE: RIO) (NYSE: RIO.US), a major producer of iron ore, aluminium, copper, and a host of other metals and minerals.

Here’s what Rio Tinto’s recent performance looks like, together with the latest consensus forecasts for this year and next:

Dec Pre-tax EPS Change Divi Change Yield Cover
2008 $9,168m 656c

+39%

112c   5.6% 5.9x
2009 $7,860m 357c -46% 45c -60% 0.8% 7.9x
2010 $20,491m 713c +100% 108c +140% 1.5% 6.6x
2011 $13,214m 809c +13% 145c +34% 2.8% 5.6x
2012 -$2,568m 503.1c -38% 167c +15% 2.9% 3.0x
2013(f) $7,112m 504c 0% 182c +9% 3.5% 2.8x
2014(f) $8,099m 573c +14% 194c +7% 3.7%

3.0x

Like the rest of the sector, Rio suffers from being a price-taker. Its products are indistinguishable from anybody else’s, and prices are purely at the mercy of world markets — there’s no brand premium or anything like that when it comes to buckets of various kinds of dirt.

Recession

And with most of the world having been in recession and demand from China having slowed, prices have slumped and miners’ profits have been hit. 

Rio’s shares have had a few tough years — from a high of 4,712p in early 2011, the price has fallen all the way to around 3,300, for a drop of 30%!

I added Rio Tinto to the Fool’s Beginners’ Portfolio back in August 2012 when the price stood at 3,048p, and it did go on to fall further — the price has since recovered to give us a small profit now.

But is there more to come? I think the answer to that is a very firm yes.

Bouncing back

Some may think there’s more weakness heading our way, but wherever I look I see signs that our economies are on the way back. The high street is doing well again, credit availability is picking up, house prices are edging up — and talking about the UK economy, Bank of England governor Mark Carney recently said “for the first time in a long time, you don’t have to be an optimist to see the glass as half full“.

Parts of the eurozone will still struggle, but Mr Carney’s words apply more generally — even the Irish economy is growing again!

And that all means that demand is on the rise and prices for Rio Tinto’s precious muck will continue to strengthen.

Too cheap

Those forecasts do suggest only a modest 14% improvement in Rio Tinto’s earnings per share (EPS) for next year, but they do put the shares on a 2014 forward P/E of under 10. Sure, P/E values for cyclical stocks like miners will tend to be below average to compensate for the expected volatility, but at this stage in the economic cycle I reckon that’s just too cheap — especially with dividend yields predicted to pick up to 3.7% next year.

I expect to see some solid recovery from Rio Tinto over the next 12 months.

Verdict: Brass from muck in 2014!

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> Alan does not own shares in Rio Tinto.