The Benefits Of Investing In Rio Tinto plc

Today I am outlining why Rio Tinto (LSE: RIO) (NYSE: RIO.US) could be considered an attractive addition to any stocks portfolio.

China iron ore sales advance

Fears of sluggish demand and swathes of oversupply flowing into commodity markets continue to have kept investor jitters on the boil for many months now. Still, latest import data from China would have gone some way to assuaging concerns over a worsening iron ore market, a critical point for the world’s major mining firms — the country is responsible for two-thirds of worldwide demand.

Chinese iron ore shipments clocked in at 82.5 million tonnes during July, the third highest reading ever and up 11% from the previous opencast.miningmonth. Domestic suppliers are shuttering their operations due to the lower cost of overseas material, a situation which is likely to intensify in coming months and could potentially put a bottom underneath the iron ore price.

And with Chinese steel-making on the rise — mill production advanced 1.7% last month from the corresponding month in 2013, to 6.96 million tonnes — the signs look good for Rio Tinto, which generates three-quarters of group earnings from the iron ore space.

Make no mistake: the iron ore market — like the rest of the world’s major commodity markets — are not out of the woods, as question marks over the state of the global economic recovery persist and producers ramp up capacity.

Still, it could be argued that uncertainties over supply/demand imbalances across commodity markets are already baked into the price. Even though Rio Tinto’s share price has enjoyed a solid bump higher in recent weeks, the business still deals on an ultra-low P/E multiple of 10.8 for 2014, just above the value watermark of 10. And for 2015 this slips to 10.1.

Divestment drive far from finished

On top of this, Rio Tinto’s aggressive restructuring programme is also sailing along at a fair clip. The company announced last week that it was reviewing its near-54% stake in Bougainville Copper Limited, which operates the Panguna copper mine in Papua New Guinea. And the move follows on from the $50m sale of its coal assets in Mozambique at the close of July.

Although these deals can hardly be described as ground-shaking, a steady conveyor belt of asset sales mean that capex outflows are further reduced, cash reserves are bolstered, and the firm’s exposure to still-weak commodity markets is further reduced. Clearly a smaller and better-focussed Rio Tinto is in a much better position to enjoy solid earnings growth in coming years.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.