Rio Tinto: Flying High on a Disastrous Year

When you're a leading global mining company with a an $81.5 billion market cap, I guess that helps to make you hard as a rock in certain respects.

The disastrous headlines and painful numbers keep pouring out of mining giant Rio Tinto (NYSE: RIO  ) , with the latest year-end earnings report besmirched by a $2.99 billion net loss against a prior-year gain of $5.83 billion. Key to the damage was an embarrassing $14 billion in impairment charges relating to the company's aluminum business and coal assets in Mozambique. Its stock, meanwhile, continues to poke around with unabated strength near a seemingly incongruous 52-week high.

The damaging rhetoric from Mongolia earlier this month -- in which President Tsakhia Elbegdorj demanded a greater role for his government in overseeing the massive Oyu Tolgoi joint venture with Turquoise Hill Resources (NYSE: TRQ  ) -- would have been enough to decimate the stock of a lesser company. The leader also expressed dismay that the cost to complete construction and expansion of the project has increased by nearly $10 billion -- from an earlier projection of $14.6 billion to an eye-popping $24.4 billion. 

We've witnessed firsthand the wreckage that similar bouts of cost escalation have cast upon major gold miner Barrick Gold (NYSE: ABX  ) , and we averted our eyes to the collapsed share price of Thompson Creek Metals (NYSE: TC  ) as the Mt. Milligan budget spiraled out of control. But Rio Tinto's stock just keeps marching along.

We've seen Cliffs Natural Resources (NYSE: CLF  ) taken to the woodshed -- and rightfully so, I might add -- for adding share dilution and a slashed dividend to the pain of a major asset impairment. Shares of Kinross Gold bear the unmistakable scars of asset impairments totaling 79% of a disturbingly recent acquisition . But when Rio Tinto makes $14 billion disappear, the market barely bats an eye. Like Kinross' Tye Burt, Rio Tinto's Tom Albanese has been replaced as a consequence of failed acquisitions. But how on earth does the stock fail to register such a grand mea culpa?

The explanation for this defiant strength in the shares of Rio Tinto is twofold. For starters, the company's iron ore business remains enormously profitable, delivering a 44% return on operating assets over the course of 2012 (even as average iron ore prices declined by 23%) . Second, with the slate essentially wiped clean from yesterday's multiple missteps, new CEO Sam Walsh will now have the opportunity to liquidate non-performing assets and book solid-looking gains in the process. Just last December, the company offloaded some non-core copper assets in South Africa for $373 million, and there's plenty more where that came from in terms of opportunities for monetization of non-core assets.

Cliffs Natural Resources has grown from a domestic iron ore producer into an international player in both the iron ore and metallurgical coal markets. It has performed well, relative to many competitors, in a very cyclical industry because of several factors that are likely to remain advantageous for Cliffs' management. For details on these advantages and more, click here now to check out The Motley Fool's brand-new premium report on the company.


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