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3 reasons to buy Rio Tinto Limited

Rio Tinto

Committed mining bosses could be about to receive the biggest bonuses of their careers. Share prices in Australia’s biggest miners, such as Rio Tinto Limited (ASX:RIO) and BHP Billiton Limited (ASX: BHP), are likely to notch up gains in 2014 after years of share price underperformance and austerity.

Rio, Australia’s – and soon to be the world’s – biggest iron ore producer has been at the brunt of shareholder fury as the legacy of its former management cost them around $44 billion in just seven years. Ouch! They certainly missed the mining boom.

But fortunes favour the brave and those who stood by the embattled miner could be rewarded handsomely in 2014. Here are three reasons why investing in Rio could be a market-beating strategy in 2014.

1. Rising low-cost production

Rio’s Pilbara mines (there are 14 in total) are some of the best iron ore operations in the world. The reason they are the best is because they are high grade, low-cost, and the available resource is huge. It is serviced by an extensive rail network and world-class ports. In addition its geographical location is excellent – right next to Asian markets. In its recent full-year production report, the miner produced 266 million tonnes (Mt) of the steel-making ingredient (inclusive of the comparatively minor contributions from its Canadian operations), with expectations for the annual production rate to reach 290Mtpa before mid-2014.

In November 2013, Rio’s board signed-off on expansion plans to take the production rate up to 360Mtpa before 2018. Ports, rail and other infrastructure are currently undergoing necessary improvements due to be finished in the next 18 months. These improvements will come at a low capital intensity of just $120-$130 per tonne, lower than originally estimated.

2. Lower debt

Low levels of debt are important for a number of reasons. They give management the ability to deliver greater returns in the form of dividends, share buybacks and efficiency gains. In addition to greater cash-flow and interest cover, management will be able to make ‘bolt-on’ acquisitions to boost productivity. Rio’s net debt dropped $4 billion from the 2013 half-year to $18.1 billion at 31 December 2013. Not a perfect amount but manageable. Interest cover was 13 times.

3. New Management

Speaking of management’s decisions. After just a year in the top job, CEO Sam Walsh has seemingly done everything right. His campaign to rid the company of extraneous assets outside the ‘core’ group structure has been mostly successful. He had to make hard decisions such as closing down mines, putting others on maintenance and making big lay-offs. Although I rarely attribute management’s success to share price increases, it has to be said he was the right man for the job. Together with iron ore boss Andrew Harding, Rio appears to be in good hands.

Foolish takeaway

Rio’s prospects are definitely improving under its current management. Investors looking to add an iron ore miner, such as Rio, Fortescue Metals Group Limited (ASX: FMG), Mt Gibson Iron Limited (ASX:MGX) or Arrium Ltd (ASX: ARI), should be bullish on the spot price of iron ore and Chinese growth. From these, Rio is the most efficient producer and will soon be the world’s biggest, at current prices it looks likely to reward shareholders in 2014.

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

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