Why Rio Tinto plc Could Still Beat The FTSE 100 This Year

Rio TintoUp until just a few weeks ago, with the mining sector still depressed by low commodity prices and by fears of a Chinese slump, I’d have said the chances of Rio Tinto (LSE: RIO) (NYSE: RIO.US) shares beating the FTSE 100 this year were slim.

But then the price rebounded a little, and by close of play on 14 October it was down 7.2% since the end of December to 3,163p, against 5.3% for the FTSE. And the gap is closing — indeed, going back a little further, over the past 12 months Rio is actually ahead of the index.


So what’s been happening? Well, there has been speculation in the press that Rio Tinto and Glencore were considering some sort of merger. On 7 October, Rio confirmed that Glencore had made an approach in July, but that it had been rejected in August and there has been no further discussion since.

But even if there is no merger, it does suggest that Glencore’s management can see value in Rio Tinto at today’s share price levels.

There was also most likely some speculative buying ahead of third-quarter figures, which were released on 15 October, although the share price did drop a little on the day.

Another good quarter

Chief executive Sam Walsh said that “We have delivered another strong quarter with record iron ore production and a solid performance in copper and aluminium“, with nine-month figures across the board looking positive overall. Fears of overproduction of iron ore, which accounted for nearly half of Rio’s turnover in 2013, are still being held at bay, as iron ore shipments grew ahead of production over both the quarter and the year to date.

So how does that leave Rio Tinto looking as an investment right now?

Current forecasts put the shares on a forward P/E of around 10 for this year and next. While that’s below the FTSE’s long-term average of 14, it’s true that mining stocks are cyclical and 10 is close to Rio Tinto’s medium-term average, so on the face it the shares might not look like a screaming bargain.

A good end to the year?

But with dividends of 4% and 4.8% predicted for the next two full years, with still no evidence of overproduction of iron, and with Chinese fears subsiding, I reckon there’s a strong chance that Rio will end the year ahead of the FTSE — and I can see a few more healthy years to follow.

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Alan Oscroft 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.