Forget About 2015: Why Rio Tinto plc Could Be On The Cusp Of A Resurgence

Today I am looking at why Rio Tinto (LSE: RIO) (NYSE: RIO.US) could be a lucrative pick for patient investors.

Earnings weakness predicted to endure

A backdrop of rising supply and lukewarm demand across the entire commodity sector has significantly hampered the revenues outlook for the world’s mining companies.

And at Rio Tinto City analysts expect troubles at the top line to keep earnings performance underwater for some time to come. The business is expected to report a 12% bottom line dip this year, with an additional 5% drop is anticipated in 2015.

While worsening market imbalances and patchy investor sentiment have weighed across all of Rio Tinto’s key commodities in recent years, it is the firm’s hefty exposure to the iron ore markets which haunts its earnings outlook — the business sources three quarters of all profits from this one resource.

And iron ore prices continue to crumble, the price of the commodity sinking to its lowest since 2009 just this week around $75 per tonne following poor housing data from commodities glutton China. With industrial activity across the Asian giant also continuing to drag, fears abound that prices of the steelmaking ingredient could fall even further in the near term.

… but mining giant playing the long game

However, Rio Tinto remains convinced that iron ore remains a long-term money spinner. The business set a production record of 216.2 million tonnes during January-September, up 11% on an annualised basis, and the firm remains on course complete expansion of its Pilbara operations in Australia in 2015, taking total capacity to 360 million tonnes per year.

And just this week Rio Tinto agreed a deal with China’s Sinosteel to extend capacity at its Channar Mining joint venture from 250 million tonnes.

Weakening iron ore market of course remains a concern, but current prices remain some way off the breakeven point for the world’s largest miners such as Rio Tinto and BHP Billiton — broker UBSestimates that the former carries a breakeven cost close to $40 per tonne.

Many smaller producers which do not benefit from the same low-cost operations of the larger operators have been forced to shutter production as a result, and Morgan Stanley estimates that 20 million tonnes of material has been curtailed so far this year. And the mothballing is expected to move through the gears as we move into 2015.

Although negative at the current time, the effect of Rio Tinto’s aggressive output hikes on the wider market is likely to prove supportive for prices in the long-term as the competition is gradually taken out and the largest operators get a larger slice of the pie.

A large surplus this year is likely to keep iron ore prices hemmed in for a little while longer. But should the global economy start to pick up again Rio Tinto could be on course to enjoy a revenues bonanza.

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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.