3 reasons Rio Tinto Limited could be a buy

Increasing production, cash flows and dividends are likely in coming years.

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It is official: Rio Tinto Limited (ASX: RIO) shareholders missed the mining boom.

From the disastrous acquisition of Alcan in 2008 until now, shareholders have been dealt the heftiest of writedowns, year after year. But could the fortunes of shareholders be about to change?

Since CEO Sam Walsh got the top job a little over a year ago, it appears he has been doing all the right things. He has reacted to investors’ concerns by setting a number of key priorities aimed at increasing productivity and cutting costs.

It would be fair to say that the next three years will likely be better than the last five years, provided the iron ore price stays above $US110 per tonne. Here are three reasons why:

1. Expanding low-cost iron ore production

Annual iron ore production is racing ahead every year. Recently, Rio’s board signed off on the necessary investment to meet a target of 360 million tonnes per annum (Mtpa) by 2018 from the group’s high-quality Pilbara operations. In its most recent full-year report that figure was 266Mtpa, meaning production will rise by up to 35% in the near term. The iron ore produced from the Pilbara is high quality and the company claims to be able to dig up and ship the ore for less than $US50 per tonne.

2. Increasing cash flows

In mining, cash flow is everything. It enables debts to be paid, exploration to continue and is the difference between successful and unsuccessful miners. Bottom line, it’s all about profitability. In 2013, Rio’s cash flow grew by 22% to $US20.1 billion.

3. Increased capital management

In 2013, increased cash flows enabled debt to drop to $US18.1 billion and a 15% increase in the full-year dividend to 192 cents per share. Shareholders can expect more of the same in the next three years as production increases, debt and capex drop, cost reductions come online and writedowns slow.

Foolish takeaway

Rather than selling underperforming Rio Tinto shares, now might be time to hold on and wait for potentially higher cash flows and dividends. However, it should be acknowledged, Rio relies heavily on the iron ore price to maintain profitability and although the company could survive with a spot price of $US90 per tonne, it certainly won’t help management in achieving their goals. Still, if you’re bullish on iron ore and ongoing Chinese demand, now could be the time to start adding Rio to your long-term portfolio.

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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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