Is Rio Tinto Limited a bargain?

Analysts and investors are expecting cost-cutting, lower debt and higher earnings will result in a bigger payout when the company's announces its full-year results this Thursday.

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After years of massive write-downs, a management changeover and mounting debt, it appears Rio Tinto Limited (ASX: RIO) shareholders will finally get the reward they deserve.

At around $67 per share Rio appears to be very good value for bullish resources investors who are confident of the ongoing demand for iron ore from Asian markets, particularly China.

Analysts at prominent ratings agencies are anticipating stronger dividend payments from the mining giant following the company's first loss and impairments of $14 billion in 2012. UBS analyst Glyn Lawcock, rates Rio as a 'buy' at current prices and his team has set a price target of $90 on the stock. He also likes BHP Billiton Limited (ASX: BHP) which has a 'buy' rating and a price target of $41 (it opened this morning at $36.42).

Not only do analysts believe Rio holds considerable value, they are also forecasting higher dividend payments to be announced when the company reports its 2013 full-year results. The consensus of analysts, according to the Australian Financial Review, is dividend increases from a current 167 cents per share to 181 cents per share – giving the miner a forecast yield of 2.7%.

Deutsche Bank analysts have acknowledged the lower gearing ratio and CEO's promise to reward shareholders with greater returns as a catalyst for potentially higher payouts. They haven't ruled out a dividend payment as high as 192 cents, but settled for a more modest forecast of 183 cents. "Over the medium term, Rio Tinto is fast delivering what investors have been seeking from large-cap miners," they said in a note to clients.

Foolish takeaway

Rio's shareholders have missed the early stages of the resources boom. Disastrous acquisitions and falling commodity prices don't bode well for any miner, but the company could be reaching a turning point. With the last of the Alcan write-downs expected to reach the annual report this year, now could be the time to take a second look at this mining giant.

Investors bullish on the resources sector should focus on the miner's debt levels, reductions in capex and outlook for key commodities such as iron ore, gold, copper and aluminium in the upcoming annual report. With rapidly growing production and significant projects in the pipeline, Rio could potentially be very rewarding for medium to long-term shareholders. Rio reports its full-year results on 13 February.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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