This Miner Thrives on Strong Chinese Data

Rio Tinto (NYSE: RIO  ) has been selling non-core assets for some time now. The company is following a strategic decision to focus on its most profitable activities. Now we can see that this strategy is starting to pay off. The company announced strong third quarter production results. In combination with fresh data from China, this makes Rio Tinto an interesting addition to your portfolio.

Strong Chinese data
Chinese iron ore imports rose 8% sequentially in September. As China is the No. 1 consumer of iron ore, this is good news not only for Rio Tinto, but also for companies like Cliffs Natural Resources (NYSE: CLF  ) and Vale (NYSE: VALE  ) .

While Cliffs was always focused on iron ore, Vale has been making a strategic shift to it. The company has been divesting non-core assets just like Rio Tinto. It looks like Vale's expectation that iron ore prices will be in the range of $120-$130 per ton in the fourth quarter is well-grounded.

Rio Tinto's iron ore production rose 3% sequentially to 68.3 million tons. Greater dynamics were achieved in copper and met coal production, which rose 11% and 18% respectively. Copper was also in the spotlight in Chinese news, as copper imports rose 18% from August numbers.

This means that Rio Tinto's increasing production could be met by the rising demand from the biggest consumer. Oversupply is one of the biggest worries for miners, and any good news from China is a bullish sign.

Mongolian progress
More positive news came from Mongolia. The country is ready to resume talks on developing underground mining shafts in the Oyu Tolgoi mine. The development of the underground mine was delayed in July by the Mongolian government, which was worried about the costs of the project.

The open-pit part of the mine has already started production, but has not come to its full capacity yet. The mine is expected to produce an average of 430,000 tons of copper and 425,000 ounces of gold per year over its mine life. In the third quarter, the mine produced 30,602 tons of copper and 62.404 ounces of gold in concentrates. You can expect these numbers to rise as the mine achieves its target production.

Bottom Line
Rio Tinto is growing production in iron ore, copper and met coal. If the prices on these products remain stable, the future is bright for the company. However, the company needs constant demand growth from China to keep prices at current levels.

The problem is that other market participants are expanding too, putting more iron ore to the market. Vale has spent $701 million on expansion of its Carajas iron ore operations just in the second quarter of this year. The company expects that this expansion would result in additional 40 million tons of iron ore production per year. On the contrary, Cliffs is not expected to make any serious moves before its CEO retires at the year end, and the new one sets a strategy for the company.

All in all, Rio Tinto demonstrates good performance. The stock yields 3.36% and trades below 10 times its future earnings. If you think that Chinese demand will continue to rise, Rio Tinto is a good bet.

More from The Motley Fool
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


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.

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: 2685421, ~/Articles/ArticleHandler.aspx, 8/22/2014 2:09:43 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...


Advertisement