Will Rio Tinto plc Join The “90% Club”?

Just seven and a half years ago, Rio Tinto (LSE: RIO) was trading at £70 per share. It was in the midst of a commodity boom which was showing little sign of slowing down. China was demanding iron ore hand over fist and its infrastructure and capital expenditure programme was in full flow, with steel being needed in vast quantities.

As such, Rio Tinto’s bottom line was soaring and investors were happy to pay a high valuation for a company which just five years prior had been as low as £12 per share. The future for Rio Tinto, it seemed, was extremely bright and there was even discussion among some investors as to when, not if, it would reach £100 per share.

Since May 2008, though, Rio Tinto’s share price has collapsed. In fact, it now stands at under £25, which is a fall of 64% since its 2008 high. This is an improvement, however, on the £21 share price which was recorded at the end of September, with improving investor sentiment being a key reason for the company’s £3 per share rise in just ten days.

Clearly, joining the so-called ‘90% Club’ is rather unlikely. This would mean Rio Tinto’s share price falling by 72% from its current level to trade at just £7 (which is 90% lower than its 2008 high of £70).

Although the company’s near-term future is rather uncertain and its bottom line is expected to fall by 49% in the current year, trading at £7 per share would mean Rio Tinto having a price to earnings (P/E) ratio of just 4.1 and a price to book value (P/B) ratio of only 0.3. Certainly, its profit may fall further and a highly challenging period may cause asset writedowns but, even still, £7 per share would appear to grossly undervalue the company’s long term potential.

In fact, Rio Tinto appears to be one of the most financially sound mining companies in the world and, when combined with an ultra-low cost curve, it seems set to emerge in a stronger position relative to its peers in the long run. This situation is due to be exaggerated by Rio Tinto’s increased production of iron ore in recent years, with it seeming to be squeezing its less efficient peers so as to put pressure on their financial outlooks. The end result may be a more powerful and more profitable Rio Tinto over the medium to long term.

Undoubtedly, Rio Tinto’s share price offers good value for money. For example, it has a P/B ratio of only 1.14 which, considering the appeal of its asset base, seems low. Therefore, it would not be surprising for a sector peer to make a bid approach, since combining two major mining companies could create an even lower cost operation which would be likely to benefit from economies of scale, improved margins and add a great deal of shareholder value.

So, while Rio Tinto has disappointed in recent years, it seems to be very unlikely to join the ‘90% Club’. Rather, it appears to be well-worth buying right now ahead of a period of huge long term capital gain potential.

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Peter Stephens owns shares of 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.