At the same as the S&P/ASX 200 (INDEXASX: XJO) has climbed 1.5%, shares in mining heavyweight Rio Tinto Limited (ASX: RIO) have fallen hard, down nearly 5% in the past month.
Thanks to the iron ore price dropping over 35% since the beginning of 2014, Rio and other miners of the steel making ingredient have come under intense selling pressure. However Rio, like its peer BHP Billiton Limited (ASX: BHP), has weathered the storm quite well with their respective shares down just 8% and 5%.
No doubt this is a sign of their low production costs and diversified operations.
Here are three reasons why I believe you should ignore the short-term volatility and continue to hold your Rio Tinto shares…
- Shares are cheap. One big reason they're cheap can be put down to the billions of shareholder dollars which have been written-off in the Aluminium and Energy divisions over the past six years. It is my belief that these two divisions have already done their worst and could now stage a recovery, albeit slowly. Iron ore accounts for 90% of group earnings (thanks largely to its excellent cost base), but other divisions returning to profitability could change that figure, over time.
- Low cost of production and high quality. This is mostly self-explanatory but Rio, being the biggest iron ore miner in Australia and second largest in the world, has comparatively close proximity to Asia and highly efficient logistics. This allows its Pilbara iron ore operations to have cash costs of just $US20.40 per tonne. All-in costs are around $US43 per tonne, compared to Fortescue Metals Group Limited's (ASX: FMG) cost of between $US70 and $US80 per tonne – for a lesser quality ore.
- Dividends are set to "materially" increase. CEO Sam Walsh recently stated that Rio is set to "materially" increase its returns to shareholders. After stripping billions of dollars out of operations, lowering capex to normal levels, increasing production and paying down debt, the scene is set for big dividends in the years ahead.
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