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The Beginners’ Portfolio Tops Up On Rio Tinto plc

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.

Last time, I was thinking of what to do with the cash we have in the pot — there’s the £724.32 raised from the sale of Vodafone, plus a total of £319.51 that has accumulated from dividends. That’s a total of £1,043.83p, and I’m splitting it two ways.

opencast.miningDigging deep

One chunk will go into a new investment to take our number of holdings back up to 10, and with the rest I’m topping up on an existing holding — and it’s Rio Tinto (LSE: RIO) (NYSE: RIO.US).

With Rio Tinto shares selling for an offer price of 3,223p on Thursday 30 January, we’ve added 15 more to our holding. Once we add dealing charges of £10 and stamp duty of £2.42, our purchase has cost us £495.87. Our two tranches look like this:

Date Shares Price Cost Bid Value Change %
16/08/2012 16 3,048.4p £500.18 3224.5p £505.92 £5.74 1.1%
30/01/2014 15 3,223.0p £495.87 3224.5p £473.68 -£22.15 -4.5%
Total  31 3,132.9p  £996.05 3224.5p  £979.60  -£16.46 -1.7%

So we have 31 shares at an average price of 3,132.9p. Our initial investment was just in profit after accounting for charges and the share price spread, and we’ve now taken that to a small loss of 1.7% on the combined investment.

That means, with the cash realised from selling Vodafone plus our accumulated dividends, we now have £547.96 to invest in a new share — I’ll be narrowing the search down soon.

Why Rio Tinto?

So why did our top-up cash go into Rio Tinto and not one of our other holdings? Well, the short answer is that I think it’s the most undervalued. For a longer answer, I’ll tell you why…

Commodities shares always fall when economies are down — demand falls, metals and minerals prices drop, and miners’ profits fall. And that’s exactly what happened during the credit crisis and recession and, more importantly, during the Chinese slowdown. China was (and still is) seen as a serious consumer of all that stuff from the earth, and its slowdown certainly hurt the sector.

Recovering

When we first bought Rio Tinto I thought it was just too cheap, although the recovery is taking longer than I’d expected — although I did stress that I’m in it for the long term and that the outlook over the next couple of years was really of no importance.

Analysts are finally turning cautiously bullish again on the sector, and several miners have now reported excellent production figures for the fourth-quarter of 2013.

Rio Tinto, in fact, told us of record iron ore shipments of 72.4 million tonnes during the three months, up 8% on the final quarter of the previous year, with year-to-date shipments up 5% to 259 million tonnes. Bauxite and thermal coal production also hit new records, and the firm reported an “impressive recovery” in copper.

Too cheap

With the shares on a forecast P/E of 10, falling to around 8 by 2015, and with dividend yields expected to rise from 3.4% to 3.9% over the next two years, Rio Tinto shares were just irresistible.

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> Alan does not own any Rio Tinto shares.