Rio Tinto (LSE: RIO) (NYSE: RIO.US) has shrugged off the emerging markets crisis with a fine set of full-year results. Here are five ways it could make you rich.
1) Springing more surprises
I’ve been surprised by how strongly mining companies like Rio Tinto have held up this year. I thought the recent emerging markets wobble would have left it in a hole, but its share price has risen to the challenge. Rio is actually up 13% over the last six months, roughly double the growth on the FTSE 100. That looks even more impressive against a 6% drop in the BHP Billiton share price. It’s amazing what a strong set of full-year results can do…
2) Continuing to deliver the goods
Rio is rocking after boosting its underlying earnings by 10% to $10.2 billion in 2013. It also set production records for iron ore, bauxite and thermal coal, while copper volumes enjoyed a strong recovery. Rio produced 266 million tonnes of iron ore in 2013, a rise of 5%. Incoming chief executive Sam Walsh deserves credit for the impressive turnaround. This time last year, Rio had just posted an embarrassing full-year loss, its first for 18 years. This impressive set of figures was enough to stop investors from worrying about China for a moment. I don’t expect that to last.
3) Keeping it tight at the back
Former chief executive Tom Albanese’s failed acquisition strategy ended in a costly $14.4 billion of write-downs, but Walsh has seized the chance to learn from his mistakes. He set a target of $2 billion of operating cash cost improvements in 2013, and delivered $2.3 billion. He targeted $750 million of exploration and evaluation savings, and hit $1 billion. Capital expenditure fell 26% to $12.9 billion, while net debt also fell. This puts Rio in a stronger position for whatever China throws at it next.
4) Delivering to shareholders
Possibly the best news of all was a 15% increase in the full-year dividend to 192 cents a share, evidence that Rio is on a sustainable course. Offloading $3.5 billion of non-core assets and cutting spending should also boost shareholder value. It is now a forecast yield of 3.5% for December, which should help investors generate a steady income stream, while waiting for current emerging market uncertainty to pass.
5) Throwing up buying opportunities
I expect further market wobbles this year, as China tries to deflate its credit bubble, and QE tapering drains liquidity from emerging markets. Rio is particularly exposed to swings in the iron ore price, which delivers almost $9 out of every $10 it earns. Yet much of the uncertainty is reflected in the price, with its stock currently trading at just 10.5 times earnings, despite recent outperformance. That makes it cheaper than BHP Billiton at 13.9 times earnings. Forecast earnings per share growth of 9% this year and another 9% in 2015 suggest now is a buying opportunity. Keep an eye on emerging markets. They may deliver another one.
