Should You Buy Rio Tinto?

LONDON -- Like all natural resources stocks, miner Rio Tinto  (LSE: RIO  ) (NYSE: RIO  ) is highly susceptible to cyclical slowdowns in the global economy and fears over commodity prices.

However, I believe that new chief executive Sam Walsh and his plan to take a hatchet to costs to streamline the business should turbocharge efficiency, resulting in a less bloated operation and excellent shareholder value.

Aggressive plans to tackle the debt
Rio Tinto announced last month that it had slumped to a $2.9 billion net loss in 2012, compared with a $5.9 billion profit the previous year. In particular, the crippling $14.4 billion writedowns involving its aluminum and Mozambique coal businesses has bashed the balance sheet.

New management has taken aggressive steps to rectify the ills of the previous administration, however. The firm plans to significantly slash cash costs over the next two years, with cutbacks of $5 billion scheduled by the end of 2014.

Rio Tinto announced last month that it has already taken the axe to exploration spending to the tune of $750 million -- or a quarter of the planned total -- and will also slow the modernization of its Kitamat aluminum complex to reduce capital expenditure.

As well, Rio Tinto is targeting the divestment of non-core businesses in order to boost the balance sheet.

In fact, reports have been circling in recent days that the firm has hired Credit Suisse and the Canadian Investment Bank of Commerce to offload its 59% stake in Iron Ore Co. of Canada. Investors should expect more disposals to cut the strain on its balance sheet and enhance shareholder returns.

A staggering value-for-money selection
City analysts predict earnings per share to leap 18% this year to 394 pence, before jumping a further 12% to 439 pence in 2014.

These earnings projections make Rio Tinto a great value pick, in my opinion, trading on a P/E ratio of 8.7 and 7.8 for 2013 and 2014 respectively. This view is compounded by sub-1 price/earnings to growth (PEG) ratings for this year and next, levels which are generally regarded as offering excellent value. A figure of 0.5 is expected this year and 0.7 in 2014.

A beefy dividend seals the investment case, with a projected dividend yield of 3.3% and 3.7% penciled in for 2013 and 2014. Shareholder payouts are also well protected, with coverage of 3.4 times anticipated over both of the next two years, providing protection against potential volatility in commodity markets.

The expert view to growth elsewhere
Whether or not you already own Rio Tinto and are looking to significantly boost your investment returns elsewhere, check out this special Fool report, which outlines the steps you might wish to take if you are hoping to become seriously rich from other shares.

Our "10 Steps to Making a Million in the Market" report highlights how fast-growth small-caps and beaten-down bargains are all fertile candidates to produce ten-fold returns. Click here NOW to enjoy this exclusive 'wealth report' -- it's 100% free and comes with no obligation.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2291235, ~/Articles/ArticleHandler.aspx, 9/29/2016 1:37:45 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,155.37 -183.87 -1.00%
S&P 500 2,154.77 -16.60 -0.76%
NASD 5,274.75 -43.80 -0.82%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 12:07 PM
RIO $2592.53 Up +67.03 +2.65%
Rio Tinto CAPS Rating: No stars
RIO $33.88 Up +0.14 +0.41%
Rio Tinto CAPS Rating: ***