Rio Tinto Plc’s Honesty Is Great For Investors

If something’s not working out then it’s often better to be honest about it. That’s why I’m encouraged by Rio Tinto plc (LON:RIO).

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As I’m sure my fellow Fools will agree, persistence is one of the prerequisites for success in almost any undertaking. Without it, no matter how much talent, ability or experience you have, the result is unlikely to be a successful one.

Equally though, there comes a time in every endeavour, whether business or non-business related, when it’s time to hold up the white flag and move onto something else. Indeed, sometimes too much persistence can be a bad thing and can actually cause you to miss out on more attractive opportunities.

This brings me neatly onto Rio Tinto (LSE: RIO) (NYSE: RIO.US), whose shares have recently hit a five-month high on the back of speculation surrounding its Alcan subsidiary.

This subsidiary has been nothing short of a disaster for Rio Tinto. It was purchased in 2007 (at the peak of the aluminium cycle — Alcan is an aluminium division) for a whopping $38bn. Although many commentators said that the price was too high at the time, Rio Tinto pushed ahead and, today, it is clear that the company vastly overpaid for this subsidiary.

So, as well as the recent news that the Pacific Aluminium division looks set to be folded into Alcan, news that Rio Tinto is moving closer to a complete sale of Alcan has left me feeling more upbeat about the company’s prospects.

For starters, it is estimated that the division uses up to $20bn of capital and offers very little in the way of return. Furthermore, the problems associated with the division and the uncertainty surrounding it have doubtless caused market sentiment in Rio Tinto to not be as positive as it could otherwise have been.

So, even though a sale of the Alcan division could lead to substantial writedowns and potential writeoffs (it is currently valued at around $12bn), its sale could provide Rio Tinto with capital and positive sentiment.

Of course, Rio Tinto remains cheap relative to its sector and index. It currently trades on a price-to-earnings (P/E) ratio of 9.7, while the mining sector trades on a P/E of 12.2 and the FTSE 100’s P/E is 15.2.

It also offers attractive growth prospects, with earnings per share forecast to increase by around 7.5% per annum over the next two years.

Of course, Rio Tinto is not the only attractive growth stock out there. Indeed, The Motley Fool has written an exclusive report entitled The Motley Fool’s Top Growth Share Of 2013.

If, like me, you are interested in potentially finding a growth stock that could be a real boost for your portfolio then I’d recommend you take a look.

It’s completely free – click here to take a look.

> Peter 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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