Rio Tinto - Rio Grande

Rio Tinto: It ain’t easy being a mining company at the moment. On the broad sweep they are wrestling with the hangover from grandiose expansion plans, often hatched in the last decade, that seem ill-suited to the current state of commodity prices. A big attraction of Rio is its major position in the copper market through its 30% share of the BHP Billiton operated Escondida mine in Chile. For copper the long-term prognosis is good, with rising consumption and an industry that will struggle to keep up with demand. Iron ore is also important and this market has been in a major slump of late with excess supply and falling prices. To their credit, Rio has today announced full year results to 31^st December 2014, which seem to be a general beat on City expectations. Whilst commodity prices have been weak, Rio has reduced costs, slashed capex, reduced debt and cranked the handle to return cash to shareholders. So net debt has come rattling down from $18.1bn to $12.5bn, against underlying earnings only down 9% at $9.3bn. Meanwhile capex has come down by about one third, to $8.2bn from $13.0bn.

The full year dividend has been raised 12% to 215c, as the board delivers on its ambition of a progressive dividend policy. At £:$1.53, this 140.5p is a 4.6% yield at 3070p. At the same time a $2bn share buyback has been announced, meaning that almost $6bn of cash is heading back to shareholders, which is a juicy 9.2% of the current total market cap of around £65bn. The guidance for 2015 is for more capex cuts (to $7bn) and a further $750m of cash cost savings. Earnings last year were down 9% at 503.4c (329p), being a PE of 9.3x and easily covering the dividend. There may be further eps slippage in 2015, but this seems a low PE for what may be near the bottom of the cycle. So there are fundamental attractions in this stock. In addition, last August, Glencore ran the slide rule over Rio with a view to a merger. This was rebuffed by Rio and has become less likely for now due to the falling value of Glencore paper. Still, there is nothing like a lurking predatory presence to keep the Rio board’s mind focussed on the job in hand and offer a further encouragement to investors. (Neil Cumming^, 12^th February 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower