Can Rio Tinto plc Really Be Worth £61 Per Share?

Rio Tinto (LSE: RIO) (NYSE: RIO.US) shares haven’t had a bad year, picking up more than 10% over the past twelve months, to 3,206p — over the same period, the FTSE 100 has struggled to break even.

Over five years the picture hasn’t been quite so good, mind, with Rio Tinto gaining only 40% compared to 55% for the FTSE. But mining is a cyclical business, and things have been looking up of late.

Slowing Chinese growth took the shine off the sector, but that looks to have stabilized — and the City is very bullish about Rio at the moment.

Rio TintoBullish sentiment

Out of a sample of 28 analysts forecasting, there’s a clear Buy consensus, with a full 18 of them on a Strong Buy stance. But what might Rio Tinto shares actually be worth?

We saw underlying earnings per share of 330p for the year ended December 2013, and we’re expecting something around the same level for the current year. And according to the company’s first-quarter production report, the year is off to a good start, with new records for iron or production and shipment.

For 2015, analysts are suggesting an EPS rise to 364p, and we even have a tentative forecast for 387p out as far as 2018.

Low valuation

Rio Tinto shares are on a forward P/E of only 10 at the moment, dropping to 9 based on 2015 forecasts — and that 2018 figure would drop it even further, to around 8. The P/E of cyclical businesses does tend to be volatile over the longer term, but if we pull an average-looking 14 out of the air, as Rio continues in an upward swing, we’d be looking at a share price of 5,418p by 2018.

Dividend yields are ticking along at around 4%, and forecasts suggest we could have another 725p to add to the pot by 2018.

That would bring us a total value of 6,143p in five years time for every Rio Tinto share bought today — a gain of better than 90%. And if those dividends were reinvested each year, we could more than double our money.

There are still some risks

Of course, Rio Tinto is still dependent on Chinese growth and on volatile world commodities prices, and there are some fears that we might be heading for a glut of some minerals, chiefly iron ore.

But so far, Rio is managing to sell all the iron it produces, and as long as that keeps up we could be in for a profitable few years.

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Alan does not own any shares in Rio Tinto.