Rio Tinto’s (LSE: RIO) shares have performed well over the past 18 months or so, rising by a staggering 120% since the start of 2016, and spurred on by rising commodity prices and improving sentiment with regards to the long-term demand outlook. But can the company’s shares continue with their upward surge, or have they already climbed too high too fast?
Long-term growth
Earlier this year the FTSE 100 diversified mining group pleased investors with a very positive set of full-year results for 2016, aided by a partial recovery in commodity prices. The Anglo-Australian mining giant swung to a profit for the 12 months to the end of December, with net earnings of $4.6bn, compared to a loss of $866m a year earlier. Underlying earnings came in at $5.1bn, 12% higher than the $4.5bn posted in 2015.
The group also managed to achieve $1.6bn of pre-tax sustainable operating cash cost improvements, and strengthened its balance sheet by reducing net debt by 30% to $9.6bn. The company has been busy optimising its portfolio, with disposals of $1.3bn announced or completed in 2016 and up to $2.45bn announced to date in 2017. At the same time, expansion continues with investment in major growth projects in bauxite, copper and iron ore.
Despite the monumental share price surge over the past couple of years, I still believe Rio has potential for further long-term growth. A P/E ratio of less than 10 means the shares are relatively inexpensive, and well-supported by a chunky dividend with a prospective yield of 6.1%.
Exciting prospects
Another diversified mining group that looks to be trading on a very reasonable valuation is Vedanta Resources (LSE: VED). The FTSE 250-listed company may be synonymous with India, but the group also has operations in Zambia, Namibia, South Africa, Ireland, Liberia and Australia, producing aluminium, copper, zinc, lead, silver, and iron ore. And since the acquisition of Cairn India from Cairn Energy in 2011, oil & gas production is also now a significant part of the business.
Results for FY2017 were very positive, with full-year revenues rising by 7% to $11.5bn and pre-tax profits reported at $1.38bn, a vast improvement on the $5bn loss it suffered the previous year. The encouraging results led the board to recommend a final dividend of 35¢ per share, bringing the total for the year to 55¢, a substantial improvement from the 30¢ full-year payout for FY2016.
Despite its geographical diversity, the group still derives around 58% of revenues from its Indian operations, and with the country’s government encouraging businesses to manufacture their products in India, the resulting growth in GDP should bring about meaningful increases in demand for metals and energy. Given such exciting growth prospects, a P/E rating of just eight for FY2018 coupled with a prospective dividend yield of 6.4% just seems too good to pass up.
