Probably The Best Reason To Buy Rio Tinto plc Today

Rio Tinto plc (LON:RIO) is likely to remain top dog in the iron ore industry for a long time, and you can profit from this, explains Roland Head.

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I’m a big fan of global miner Rio Tinto (LSE: RIO) (NYSE: RIO.US), which I view as possibly the best way to earn a reliable, long-term income from most of the world’s core commodities.

Although the firm’s share price is currently less than half the crazy peak of 7,078p that it reached on May 19, 2008, I reckon Rio’s shares are more attractive than they have been for years.

A deep moat

One of the characteristics I look for when taking a long-term position in a large cap company is a deep economic moat – an in-built advantage that makes it hard for competitors to steal market share.

In the commodity business, moats are relatively rare; product and brand differentiation is unlikely, so the only way to defend yourself from competition is through large scale and low costs. This is where Rio scores highly and earns itself a moat rating.

Rio has a market capitalisation of £60bn, and all of its assets are on a vast scale. The firm’s iron ore mines in the Pilbara region of Western Australia are particularly impressive.

Rio sold 198,869,000 tonnes of iron ore in 2012, at an average price of $122 per tonne. These sales generated EBITDA (earnings before interest, tax, depreciation and amortisation) of $15.7bn, which equates to profits of $79 per tonne of iron ore, and costs of just $43 per tonne – the lowest costs in the industry.

The current price of iron ore is around $140 per tonne, and although it might weaken over the next few years as demand growth slows and supply increases, it is unlikely to drop so far that Rio can’t make a healthy profit from selling it.

Is Rio cheap enough to buy?

Like all the big miners, Rio’s share price is much more volatile than most other FTSE 100 companies; Rio shares have risen by 16% over the last month, for example, but fell by almost 10% in the first three weeks of June.

My recommendation would be to choose a good entry point, and then ignore the firm’s share price and concentrate on the yield. Happily, that’s not too difficult to do, thanks to Rio’s attractive valuation.

Rio’s share price at the time of writing was 3,177p providing a forecast P/E of around 9.8, and a prospective yield of 3.7% – both of which are much more attractive than the FTSE 100’s forecast P/E of 14.1 and prospective yield of 3.3%. 

A market-beating habit

Buying shares cheap, and holding for long-term gains, is one of the most reliable ways to beat the market.

It’s certainly a technique that has worked for top UK fund manager Neil Woodford. If you’d invested £10,000 into Mr Woodford’s High Income fund in 1988, it would have been worth £193,000 at the end of 2012 – a 1,830% increase!

If you’d like access to an exclusive Fool report about Neil Woodford’s eight largest holdings, then I recommend you click here to download this free report, while it’s still available.

> Roland owns shares in Rio Tinto.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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