Should You Buy Rio Tinto plc After Robust Q4 Results?

Today’s trading update from Rio Tinto (LSE: RIO) (NYSE: RIO.US) has been described as ‘robust’ by the company’s CEO, Sam Walsh, who stated that output in the quarter has been in-line with targets across all major products.

Of course, the update comes at a crucial time for Rio Tinto, with a falling iron ore price hurting its bottom line and its share price being somewhat supported by bid potential from Glencore. Looking ahead, though, is it a stock that is worth buying for its long term potential, or are there better options out there?

Production Performance

Clearly, the price of iron ore matters hugely to Rio Tinto, since the vast majority of its operations are focused on producing that particular commodity. So, with it having fallen considerably during the course of 2014, Rio Tinto’s bottom line is under pressure. Despite this, the company has increased production of iron ore in the fourth quarter of 2014, with total production of 79.1m tonnes being 12% higher than the comparative figure from last year.

This takes Rio Tinto’s total production for 2014 to 295.4m tonnes, which is 11% higher than in 2013, although it drew on stockpiles in the Pilbara to ship 302.6m tonnes of iron ore in 2014. This additional 7.2m tonnes is worth around £265m at current prices and affords Rio Tinto the financial flexibility to facilitate an accelerated ramp up of the expanded port and rail facilities at the Pilbara to 290m tonnes per year. In other words, Rio Tinto continues to significantly invest in its production capability, which could provide an improved position relative to its peers in the long run.

Meanwhile, there was mixed production performance from Rio Tinto’s other divisions, with aluminium production broadly flat on last year, mined copper production 4% higher than last year due to the ramp up at Oyu Tolgoi in Mongolia, and mined gold production up 69% year-on-year as a result of higher grades and the ramp up in Mongolia.

Looking Ahead

Despite increased production of iron ore, Rio Tinto is forecast to post a decline in earnings of 16% for 2014. And, looking ahead, its bottom line is set to fall by a further 18% in the current year. This puts Rio Tinto on a forward price to earnings (P/E) ratio of 11.3, which seems to be good value when you consider that there is the potential for a bid from Glencore, while shareholders are also expected to receive a dividend yield of 5.2% in the current year.

So, while a low iron ore price could be set to stay for some time, Rio Tinto still seems to be a sound investment. As today’s production update showed, it is making good progress in terms of increasing its market share and in investing for long term growth. And, while earnings may disappoint in the short term, the combination of great value, a top notch yield and bid potential makes Rio Tinto a stock that is worth buying at the present time.

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Peter Stephens owns shares in Rio Tinto. 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.