The share price gain of Rio Tinto Limited (ASX: RIO) has been up almost 9.5% in the last three months, easily outpacing the S&P/ASX 200 Index's (ASX: ^XJO) 1.3% rise. Although the index is hitting multi-year highs, Australia's biggest iron ore producer is still ranging under its $72.30 high set back in late 2012 due to weaker iron ore prices.
But it can survive better than most other iron ore producers for two big reasons.
1) The lowest cost producer
When you are in a commodity business where you can't set the price of the commodity, you have to take whatever the market gives you at the time. One of the biggest factors of success and survival is producing at the lowest costs possible.
Rio Tinto is that producer in the iron ore industry, beating BHP Billiton Limited (ASX: BHP). Even the third largest producer, Fortescue Metals Group Limited (ASX: FMG) is getting squeezed.
Rio has one of those classic competitive advantages that allow it to endure more than its rivals when the market is down and will probably make it one of the first to rise when the mining industry ticks back up again.
This advantage was underlined when The Australian Financial Review reported that Cliffs Natural Resources, a US-based mining company (the fifth largest Australian iron ore producer after the "Big Three" and Arrium Ltd (ASX: ARI)) has suffered under low iron ore and coal prices and may need to consider selling off its Australian assets. It produces around 11 million tonnes a year, but the smaller scale of the business and lower iron ore grade prevent it from achieving lower costs.
2) Scale of business
The other advantage Rio Tinto has over junior miners- the sheer volume of production. It was able to meet its 290 million tonne annual production goal and is pushing on to reach its 320 million tonne target. In the short term it can keep its earnings up by simply producing more if the iron ore price slips down. Junior miners find it difficult and expensive to expand and get pinched between high costs and lower commodity prices.
