Why Rio Tinto plc Should Be A Candidate For Your 2014 ISA

Mining shares like Rio Tinto plc (LON: RIO) might be down, but they have great long-term potential.

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You might have heard that mining shares have been having a tough time of late, what with Chinese economic growth having slowed and commodities prices hitting a resulting slump.

rio tintoSo, then, would it surprise you to learn that Rio Tinto (LSE: RIO) (NYSE: RIO.US) shares are actually ahead of the FTSE 100 over the past 12 months, gaining 7% to today’s 3,288p, while the index itself has managed only around 4%?

How about over the past five years covering the banking crisis, the recession, and the supposed Chinese crunch? Sure, Rio Tinto shares have been pretty volatile, but again they’re ahead of the FTSE with a rise of better than 75%.

The longer the better

Foolish ISA investors, of course, will be looking to the longer term than that, so what does the past decade look like? Well, the Rio Tinto price has trebled, blowing away the FTSE’s mere 50% gain over the same period.

So is that stuff about a mining crunch a wee bit overblown then?

Consider that alleged Chinese crisis — China’s growth rate for 2014 is currently forecast at only around 7.5%, which is a rate that most countries can only dream of — and make your own mind up!

Valuable muck

mine siteAnd look at what Rio Tinto produces — iron ore, aluminium, coal, copper, nickel, gold, silver. Do you think any of those are likely to go out of fashion in the next 20-30 years? And if you really think that demand is shaky, consider that Rio managed record shipments of iron ore in 2013, together with record production for both bauxite (aluminium ore) and thermal coal.

And for 2013, the company enjoyed a 10% rise in underlying earnings and lifted its dividend by 15%.

Dividends, too

Oh, yes, dividends — on top of that FTSE-busting share price performance over the past ten years, Rio Tinto dividends are forecast to yield around 4% per year.

And if that isn’t enough, the shares are currently valued on a forward price to earnings (P/E) ratio of only around 9 for 2014, dropping as low as 8.5 for 2015. The FTSE forward average currently stands at 17, meaning that Rio Tinto shares command only half the average price relative to earnings.

Millionaire dreams

With fundamentals like these, I don’t think a share price rise of around 6% per year going forward is too much to hope for — and if that comes off over the next 20 years coupled with a 4% annual dividend yield, every £1,000 invested in Rio shares in an ISA today could be worth £6,700 by 2034.

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.

Alan does not own any shares in Rio Tinto.

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