Should You Buy Rio Tinto?


LONDON -- Like all natural resources stocks, miner Rio Tinto is highly susceptible to cyclical slowdowns in the global economy and fears over commodity prices.

However, I believe that new chief executive Sam Walsh and his plan to take a hatchet to costs to streamline the business should turbocharge efficiency, resulting in a less bloated operation and excellent shareholder value.

Aggressive plans to tackle the debt
Rio Tinto announced last month that it had slumped to a $2.9 billion net loss in 2012, compared with a $5.9 billion profit the previous year. In particular, the crippling $14.4 billion writedowns involving its aluminum and Mozambique coal businesses has bashed the balance sheet.

New management has taken aggressive steps to rectify the ills of the previous administration, however. The firm plans to significantly slash cash costs over the next two years, with cutbacks of $5 billion scheduled by the end of 2014.

Rio Tinto announced last month that it has already taken the axe to exploration spending to the tune of $750 million -- or a quarter of the planned total -- and will also slow the modernization of its Kitamat aluminum complex to reduce capital expenditure.

As well, Rio Tinto is targeting the divestment of non-core businesses in order to boost the balance sheet.

In fact, reports have been circling in recent days that the firm has hired Credit Suisse and the Canadian Investment Bank of Commerce to offload its 59% stake in Iron Ore Co. of Canada. Investors should expect more disposals to cut the strain on its balance sheet and enhance shareholder returns.

A staggering value-for-money selection
City analysts predict earnings per share to leap 18% this year to 394 pence, before jumping a further 12% to 439 pence in 2014.

These earnings projections make Rio Tinto a great value pick, in my opinion, trading on a P/E ratio of 8.7 and 7.8 for 2013 and 2014 respectively. This view is compounded by sub-1 price/earnings to growth (PEG) ratings for this year and next, levels which are generally regarded as offering excellent value. A figure of 0.5 is expected this year and 0.7 in 2014.

A beefy dividend seals the investment case, with a projected dividend yield of 3.3% and 3.7% penciled in for 2013 and 2014. Shareholder payouts are also well protected, with coverage of 3.4 times anticipated over both of the next two years, providing protection against potential volatility in commodity markets.

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Maynard Paton has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

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