Global mining and metals firm and Best Ideas portfolio holding Rio Tinto (RIO) offered investors a dose of good news Thursday. The company noted that it achieved record quarterly and annual iron ore production and that shipments from the Pilbara exceeded production by two million tons in the fourth quarter, despite the impact from cyclone Christine. Rio Tinto also indicated that it has achieved over $2 billion of operating cash cost improvements in 2013 versus 2012 (as outlined previously here), a critical improvement given the supreme importance of commodity producers lowering their positions on the cost curve (in light of a highly-volatile commodity price environment). The firm also noted that it has reduced exploration and evaluation expenditures by over $1 billion in 2013 as it shed $2.5 billion in non-core assets during the year. Rio Tinto continues to execute well as it shores up its balance sheet and focuses on improving its position on the commodity cost curve.
Valuentum’s Take
We believe Rio Tinto has upside to $63 per share under base-case iron-ore price projections and a “normalizing” environment for steel demand in China (shares are currently trading in the mid-$50s). We’re big fans of the firm’s Australian Pilbara operations, which have close proximity to some of the world’s largest and fastest-growing markets for iron ore. The company also has a nice position on the cost curve for aluminum smelting, and its copper assets are of high quality. We also like that management is taking nice strides to position the company for future dividend increases in reducing cash outflows (exploration expenditures, capital spending). Though Rio’s dividend payments can be lumpy on a year-to-year basis, the company’s annualized dividend yield (3%+ at the time of this writing) is elevated and offers icing on the cake for the valuation thesis. See dividend history >>