The BULL case for Rio Tinto Limited

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There’s not much more a CEO can do than what Sam Walsh of mining heavyweight Rio Tinto Limited (ASX: RIO) is trying to accomplish.

After inheriting a company which had just posted one of the biggest write-downs in mining history and suffered one of the greatest periods of shareholder destruction of any Australian company, he certainly had his work cut out.

But it seems he’s up to the challenge. In fact, more than that. He and his management team have set a number of hefty goals in the face of an investment community who lost faith in the miner and the resources sector in general.

However, as we’ll soon discover, the huge plans unfolding in the mining giant’s boardroom and conference facilities needs more than just good management.

Rio's next 3 years

Source: Rio Tinto Limited – Annual Report 2013

Iron ore prices

Firstly, iron ore prices need to remain robust. Its Rio’s, and rival BHP Billiton Limited’s (ASX: BHP), most lucrative commodity. It represents more than a staggering 90% of earnings. For any of the company’s major goals to come to fruition, it needs its primary revenue generator to operate at full capacity. But – as far as retail investors are aware – it has little control over the prices set in the competitive price taking market.

Cost targets are met

Rio will survive under almost any iron ore price because of its low costs and excellent quality, particularly the ore from its Pilbara operations. However, management have identified areas where further cost reductions are possible. Compared to 2012, it anticipates $US3 billion of reductions are achievable by 2015. In 2013 it delivered $US2.3 billion of operating cash cost improvements.

Production increases

Iron ore production is set to increase significantly in coming years as a result of efficiencies and increases to port, rail and mine infrastructure. From its Pilbara iron ore operations, it aims to be producing 290 million tonnes per annum (Mtpa) by mid-2014. Recently management signed-off on a 360Mtpa expansion, which it hopes will be achieved before 2018.

Cash flow increases

As a result of increased efficiencies, cash flow will increase beyond a current $US20.1 billion and provide scope for capital management including dividend increases.

Debt and Capex decreases

As the plan unfolds, debt reduction will be a priority of management thanks to greater revenues and decreased costs and capex. Currently at $US18.1 billion, management will be eyeing a return to more comfortable levels in the short term, particularly if commodity prices stay strong. The capex target of $US8 billion by 2015 is quite a way away from the $US12.9 billion currently.

Foolish takeaway

Of course, other considerations need to be taken into account to accurately gauge the company’s prospects in the near term. Such as Chinese and broader Asian growth, divestments and diversification. However, provided the company does not continue its seemingly expected write-down schedule into the future, a bullish resources investor could find significant shareholder value at Rio’s current price.

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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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