2 big reasons to buy Rio Tinto Limited shares today

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Rio Tinto Limited (ASX: RIO) has enjoyed a once-in-a-lifetime commodity boom and subsequent bust.

This boom/bust cycle has sent shareholders on a roller-coaster ride with the share price soaring from around $30 in 2003 to over $150 in 2008. The share price is currently at $47 which is roughly the same price level the shares were trading at in the wake of the global financial crisis in 2009.

So could the future be bright for Rio Tinto’s shareholders? Here are two reasons to believe that it could be…

Strategic focus

Rio isn’t sitting on its laurels having recently unveiled a new organisational structure and executive team to drive future performance. This drive will be led by newly installed CEO Mr Jean-Sebastien Jacques and will see a new organisational structure being implemented.

The structure will consist of four product groups, namely: Aluminium, Copper and Diamonds, Energy and Minerals, and Iron Ore. A newly shaped Growth and Innovation group which will focus on future assets and technical support will also be formed.


The cyclical nature of a commodity business means that in the good times a miner such as Rio Tinto or BHP Billiton Limited (ASX: BHP) earns huge profits, but in the bad times profits dwindle.

A review of Rio’s historic earnings paints the picture.

Back in 2008 the group earned nearly $10 per share. This year and next, consensus forecasts provided by Reuters are estimating the group will earn around $2.10 per share.

The key to valuing a mining stock such as Rio is to focus on ‘through the cycle’ earnings and not to fall into the trap of projecting current earnings into perpetuity.

Assuming commodity prices are near the bottom of the cycle at present, then the longer term prospects for Rio’s earnings appear positive and its share price is arguably attractive.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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