£500 to invest? A 6%-yielding FTSE 100 gem I’d buy right now

What does £500 get me in this strange negative interest rate world? Well, at its current price, about 10 shares in Rio Tinto (LSE:RIO). On the face of it, this does not seem like much – iron ore mining is definitely not as glamorous as tech, fashion or renewables. But, as J.R.R Tolkein once wrote in his famous Lord of the Rings trilogy “All that is gold does not glitter.” Simply put, sometimes true value isn’t necessarily obvious and this was certainly the case for me and this rarity of a FTSE 100 stock.

A worldwide operation

Rio Tinto is one of the largest mining companies in the world and its main products are commodities such as iron ore, copper, bauxite and diamonds. Commodities are cyclical in nature, meaning that they do well during certain periods of the year but this is one of the few major mining companies that remains profitable through the cycles. This is partly due to its diversification of products and partly to do with its main operations being located in so-called “safe haven” regions of the world, like Australia, North America and Europe. The great thing about Rio Tinto’s main locations is that it has little to no risk of political and conflict-related disruptions, as is often the case with mining operations in other parts of the world.

Current market conditions

Back in May, record high iron ore prices ($223 per tonne) sent the price of this stock upwards and into the region of overvaluation, but a decision by China (the world’s top iron consumer) to clean up the polluting nature of its industrial sector, specifically coal-fired steel mills, dropped the price to $94 per tonne by September. This has corrected the overvaluation in this stock, and since then the price of iron has starting to climb again, I am seriously considering buying this particular FTSE 100 stock. Long term, iron and copper have the advantage that they are here to stay. Production methods may have to become more sustainable but the actual products remain a staple of any modern society.

An excellent FTSE 100 business

Rio Tinto does excellent business. Despite having a price-to-book ratio of 2.10 at the moment, the current price of about 5050p is backed by net earnings that far outstrip other major competitors like Anglo American and Barrick Gold. It had $9bn in free cash flows last year and, with a dividend yield of 6%, there’s plenty to go around for investors. In 2020 it netted $9bn – an incredible 22% on total revenues of $44bn. These monster net earnings have been the trend since 2016, which seems to indicate a durable competitive advantage.

My only caveat with this mining stock is that all indications suggest that, at the moment, it is slightly over-priced on a price-to-book ratio basis. However, I could personally justify this purchase given the low price-to-earnings ratio of just six times earnings, Rio Tinto’s massive treasure chest of free cash flows, and analyst expectations of even higher dividends in future.