Huge Value Play in this Stock
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Rio Tinto (NYSE: RIO) is involved in the exploration, development, and production of various minerals and metals like aluminum, diamonds, copper, and iron ore. On a global scale, the company is the second largest iron ore producer, and the lowest cost iron ore miner. Rio Tinto recently reported that it mined a record amount of iron ore in September, and that it would be ramping up its production levels by up to 20 million tons.
Iron ore prices have remained under pressure due to weak global economic sentiment, oversupply, and reduced demand. This had pushed iron prices to their 3 year lows but some experts now believe iron ore is ready to stage its turnaround. According to the recent economic data, Chinese iron ore imports are at their 20 month highs. Also, the $156 billion Chinese infrastructure stimulus package recently drove Chinese steel futures to 2 month highs. Analysts around the globe believe that iron ore prices have bottomed out, and that now, only upside is in store. The company is looking to expand its mining operations in Pilbara region, with a $3.7 billion investment.
The company recently launched its line of diamond jewelry from its Bunder diamond mine in India. The mining operations in the country are expected to generate nearly 10,000 jobs and constitute up to 6% of the total production of the company.
The financial results largely remained under pressure thanks to the falling copper and iron ore prices. Since the announcement of the stimulus package in the US, copper prices have recovered by more than 10%, due to improving economic sentiment. Economists around the globe are finding it hard to predict copper trends of 2012, as the stimulus packages are not yet in action. With the onset of 2013, analysts believe that the copper demand will outpace supply. Management is bullish on both copper and aluminum pricing, and believes the future looks bright.
Falling coal prices have also put pressure on Rio Tinto’s quarterly performance, and management believes that unloading coal assets is the best play. The company sold off two of its coal mines in South Africa along with the full stake sale in Palabora Mining.
Rio Tinto shares its market space with Newmont Mining (NYSE: NEM), Turquoise Hill Resources (NYSE: TRQ) and BHP Billiton (NYSE: BHP).
|
Company |
Forward P/E |
Debt/Equity |
Net Profit Margin |
Dividend Yield |
|
Rio Tinto |
6.56x |
38% |
8.45% |
3.4% |
|
Newmont Mining |
10.97x |
47% |
8.10% |
2.55% |
|
Turquoise Hill |
24.91x |
44% |
-266% |
0% |
|
BHP Billiton |
12.05x |
43% |
21.50% |
3.28% |
Amongst the competitors, BHP Billiton enjoys the highest net profit margin, with Rio Tinto behind it. However, Rio Tinto takes the lead with the lowest debt/equity levels and the highest dividend yield. Additionally, the financial metrics indicate that Rio Tinto is the most undervalued stock among its peers. Analysts expect EPS growth of the company over the next 5 years to be around 16.80%.
The expansions won’t benefit the company financially in the current year, but it is the growth prospects that power the stock. The diamond mine in India also looks great as it is the second largest populated country in the world. Keeping the macroeconomic conditions in mind, in my opinion, iron ore prices have bottomed out. The company holds minimal debt to equity levels coupled with great fundamentals. It is due to these reasons, that Rio Tinto has a Foolish Buy Rating for the long term, and patient investor.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
