The market made a nice recovery last week. We regained Dow 25k and the markets are looking stable, for now. During all the turmoil I added to my positions in AAPL, UPS, and BNS. These were largely special buys based on the opportunity presented at the time. I’ve been looking at a couple new companies and Rio Tinto looked interesting. Shares have rallied significantly on the backs of higher commodity prices. The recent earnings release was solid and the company announced a monstrous dividend to be paid out this spring.
Rio Tinto is a leading international mining company based in the U.K. The company mines and develops a variety of materials including aluminum, copper, iron, diamonds, salt, and even uranium. Rio Tinto ran into some trouble in 2015 when commodity prices declined. However, these declines resulted in significant cost cutting measures and efficiency improvements. With prices now on the rise, Rio Tinto is well positioned for the future. The company also pays a generous 5% dividend and has a low P/E of 11.
Despite significant improvements over the last year, Rio Tinto is arguably my riskiest investment. As discussed in the Value Line report, earnings are difficult to predict in this case. Mining is capital intensive and the company’s revenue is largely dependent on commodity prices. Rio Tinto is still best in class when it comes to mining stocks and they benefit from a variety of headwinds. The company significantly reduced its debt in recent years and enjoys healthy demand for its products.
Gross Debt/EBITDA declined from 1.87 in 2015 to 1.03 in 2017. This represents the ratio of debt to earnings before interest, tax, depreciation, and amortization. This is a significant reduction! More importantly, Rio has some industry headwinds across the horizon. China’s infrastructure demand continues to push iron ore prices higher. In addition, Trump’s commitment to spend $1.5 trillion on infrastructure in the U.S. could push demand even higher. On a more long term outlook, electric cars are expected to fuel demand for a variety of metals used in the production of batteries.
In an odd way Rio Tinto is sort of a hedge against buying an oil company like ExxonMobil. If oil demand somehow declines due to a rapid adoption of election cars, demand for various metals will skyrocket. Rio Tinto also stands well on its own. Revenue is rising rapidly as commodity prices recover. Even though the company is somewhat dependent on commodity prices, they are taking the right actions with regards to their debt. A company without debt, by definition, cannot go bankrupt.
DISCLAIMER: I am not a licensed investment advisor or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.