According to some analysts, shareholders in Rio Tinto Limited (ASX: RIO) have only been able to watch as the mining boom passed them by.
But could the mining giant be about to stage a comeback?
Growing production, falling prices
Whilst Rio is often considered alongside BHP Billiton Limited (ASX: BHP) as being "diversified", over 90% of the miner's FY13 earnings were derived from iron ore. A steelmaking ingredient.
Whilst in recent years iron ore miners, from the global giant Vale SA (ADR) (NYSE: VALE) to junior miner BC Iron Limited (ASX: BCI) and middle-heavyweight Fortescue Metals Group Limited (ASX: FMG) have boasted healthy profit margins and big dividend yields, it appears the good times have ended…
Since December 2013, when it was fetching over $US135 per tonne, the iron ore price fell over 31% to below $US93 per tonne in June 2014. That's significantly below Rio's average realised price of $US126 per tonne which it achieved last year.
So why am I considering buying it?
As I noted above, Rio's share price has had a horror run since their its highs of $155 in 2008. However, since that time, the company has been plagued by write-offs as a result of low aluminium, coal and uranium prices, whilst the price of copper, its second-biggest earnings generator, has slowly drifted lower since 2010.
Whilst lower commodity prices will result in lesser earnings, it provides long-term investors with a buying opportunity. During these times miners will lower average per unit costs, increase cash flows and enter a phase of consolidation. Something growth investors fail to recognise as a good thing.
Recently we have seen Rio increase iron ore and copper production in the first half of the year (this will continue in the near term), but I believe debt will also fall in the next year. Dividends will increase and, if write-offs are held at bay, profits could surprise the market.
To buy, or not?
I'll buy Rio Tinto shares in the near future. Due to trading policies I can't do it within the next three days, but I'm rarely ever in a rush to buy stocks anyway. Whilst I've been bearish on the company in the past, I believe that if you were ever planning on buying it, now will prove to be a good time. That is, "when all the bad news is on the table."
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