Shares in Australia's biggest iron ore miner, Rio Tinto Limited (ASX: RIO), are again trading higher today. In the past month, they're already up 3%.
So why are shares all of a sudden outperforming the S&P/ASX200 Index (INDEXASX: XJO), and does Rio deserve your consideration?
I think now is a great time for investors to buy some Rio Tinto shares, for a number of reasons:
- Investors have forgotten Rio is the lowest cost producer of high grade iron ore. This means it'll be profitable even under the worst spot price forecasts. As an example, its Pilbara cash costs are just $20.40 per tonne, compared to a spot price of $93 per tonne.
- Rio's aluminium division has been through the tough times, depressing the company's share price. In coming years the once troubled division (it has announced billions of dollars of write-offs since the GFC) will likely experience a recovery, as a result of cost cuts, non-core asset sales and closures of unprofitable facilities.
- Copper production will increase in the next decade and grow its contribution to overall group earnings.
- The energy division (which includes coal and uranium assets) could be at its lowest point of profitability. Thus providing long-term upside.
- Debt is dropping. It's currently down to approximately $16.1 billion, within management's target range.
- Increasing cash flows make the possibility of stronger dividends much more certain. At its 2014 half-year results presentation, CEO Sam Walsh made a key point that the miner will materially increase its payout. This will support a higher share price.
- Shares are well priced. Compared to its blue-chip counterparts listed on the ASX, shares trade on a modest valuation and present as a solid long-term buy.
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In my opinion Rio is a solid long-term buy at today's price and investors seeking both dividends and capital gains should consider adding it to their collection. With most of its write-offs hopefully now well behind it, shareholders can, in my opinion, look forward to a much more profitable future – I know I am! However, if Rio's not to your liking, I suggest you strongly consider our top analyst's best dividend stock idea, which can be found below.
