What always fascinates me about resource stocks is that they can do all the running around they want, but their bottom line is almost entirely dependent upon the level of demand for the resource they sell.
For instance, a mining company can cut costs through laying off workers, closing mines and a whole host of other measures. But if the price they are able to obtain for their metal is too low, they will inevitably make a loss.
Sometimes, for resource companies, the best they can do is simply never going to be good enough.
With this in mind, I was very interested to see that iron ore recently reached its highest price since April, rising to $133.10 per tonne. Of course, iron ore is used in the production of steel and, as such, has been heavily demanded by China, leading to substantial price rises. In fact, China is the largest consumer of iron ore, accounting for some 60% of the global seaborne market.
So, a rising iron ore price is great news for Rio Tinto (LSE: RIO) (NYSE: RIO.US), since a substantial amount of company revenue is generated by its sale.
In addition to benefiting from a rising iron ore price, shareholders in Rio Tinto should be feeling upbeat about a price-to-earnings (P/E) ratio of just 10.3. This compares extremely favourably to the wider mining sector, which has a P/E of 12 and to the FTSE 100, which has a P/E of 15.2.
Furthermore, Rio Tinto’s earnings per share are forecast to increase at an annualised rate of 8.5% over the next two years, meaning this could be an appealing stock for growth-seeking investors.
However, before you pile into Rio Tinto, I would strongly recommend you take a look at The Motley Fool’s Top Growth Share of 2013.
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> Peter owns shares in Rio Tinto.
