The Contrary Investment Case: 3 Reasons Why Rio Tinto plc May Be A Strong Buy

Royston Wild looks at why Rio Tinto plc (LON: RIO) may be a fantastic investment choice.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.


In recent days I have looked at why I believe Rio Tinto (LSE: RIO) (NYSE: RIO.US) could be headed for the downside (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors that could, in fact, make Rio Tinto a shrewd addition to your shares portfolio.

Steel demand poised to tick higher

Rio Tinto derives around nine-tenths of group earnings from iron ore, making it particularly susceptible to the market’s weak fundamentals as a glut of supply continues to march on board. However, many believe that improving macroeconomic conditions — and crucially a resurgence in global construction activity — should mitigate the market imbalance as steel demand accelerates.

A recent survey conducted by the Financial Times showed that steel analysts expect global output to rise 3.6% during 2014, with a sharp snapback in European production set to outstrip planned curbs at Chinese mills. Meanwhile, signs that Beijing is failing to adequately implement planned plant closures could push these projections still higher. This positive outlook follows the 3.5% uptick in smelting activity seen last year, according to World Steel Association numbers.

Iron ore woes already priced in?

Even for those who believe that steel production over the medium term will fail to adequately mop up the vast amounts of iron ore floating around the system, it could be strongly argued that an uncertain outlook for the steel-making ingredient is already factored into Rio Tinto’s current trading price.

With earnings expected to rise 8% in 2014 and 9% in 2015, this leaves the mining giant changing hands on P/E ratings of 9.5 and 8.7 for these years, comfortably below the value benchmark of 10 and providing a meaty discount to the entire mining sector’s forward average of 18.8.

Restructuring continues to deliver

Rio Tinto has undergone a vast transformation programme in recent years to deliver a more streamlined, earnings-creating machine. And the firm’s finals last month showed the terrific progress which these measures are making — operational cast cost improvements of $2.3bn last year vastly exceeded the company’s original $2bn target, and more is pencilled in to come.

As well, the mining giant remains active in stripping out non-core assets in order to bolster its already-sizeable cash pile, and generated $2.5bn through a variety of disposals made during the last year. Rio Tinto is also drastically scaling back capital expenditure across its operations, with such outlay falling 26% in 2013 alone to $12.9 billion. With commodity markets set to remain under the cosh for some time, these expense-slashing steps are essential to deliver earnings growth.

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.

> Royston does not own shares in Rio Tinto.

More on Investing Articles

Investing Articles

If I’d put £10,000 into Meta stock at the start of 2024, here’s what I’d have now

Our writer looks at the year-to-date performance of Meta stock and considers whether he'd consider buying this magnificent tech share.

Read more »

Hand arranging wood block stacking as step stair on paper pink background
Investing Articles

Investing £5 a day in this dividend giant can make me a £14,067 annual second income!

This FTSE 100 high-yield star can make me a major second income, supported by a strong business outlook and an…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Taylor Wimpey shares yield a fabulous 6.41%, but is the dividend safe?

Harvey Jones has enjoyed plenty of growth and income after buying Taylor Wimpey shares last year. But is today's high…

Read more »

Yellow number one sitting on blue background
Investing Articles

1 FTSE lithium stock I think could be ready to rocket

Jon Smith explains why the lithium price could be due a rally, and why shares of one related FTSE stock…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
US Stock

This growth stock that Warren Buffett owns just hit 52-week lows. Should I buy?

Jon Smith flags up a high-profile US stock that the great Warren Buffett bought back in 2020 but which has…

Read more »

White female supervisor working at an oil rig
Investing Articles

Could the UK general election be bad news for this FTSE 250 energy producer?

The country is due to vote in the general election on 4 July. Our writer looks at the possible implications…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should we buy cheap FTSE 100 shares now, before it’s too late?

The FTSE 100 is up 5% so far in 2024 and hit an all-time high in May. That means the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Here’s why I think the Lloyds share price could hit a 5-year high in 2024

It's up 13.5% so far in 2024, and reaching new highs. But where might the Lloyds Bank share price go…

Read more »