Should I Buy Rio Tinto?

Published in Company Comment on 31 October 2012

Harvey Jones sizes up Rio Tinto (LSE: RIO).

It's time to go shopping for shares again, but where to start? Out-of-fashion retailer Marks & Spencer (LSE: MKS)? Pipeline prince National Grid (LSE: NG)? Or oil major Royal Dutch Shell (LSE: RDSB)?

There are loads of great stocks to aim at, and I'm ready to lock and load. So here's the question I'm asking right now. Should I buy Rio Tinto (LSE: RIO) (NYSE: RIO.US)?

Vino Tinto

Now doesn't look like a great time to dig deep for the miners. After the breakneck double-digit growth of recent years, a slowing China could prove a shock for London-listed commodity giants such as Rio Tinto, hitting demand for iron ore, copper, aluminium and lead. Markets can't seem to decide whether we're getting a hard or soft Chinese landing, with Rio Tinto's share price leaping and crashing about. It currently trades at £31.42, some 21% below its 52-week high of £39.88. Many investors will find that tempting, so should you buy it? Should I?

Blame it on Rio

The price of iron ore, Rio Tinto's biggest commodity, has slumped on sliding Chinese demand. In August, Rio Tinto reported a sharp dip in revenues and profits, which it blamed on the "volatile, challenging" economy. Pre-tax profits plummeted to $6.7 billion in the six months to June 30, down from $11 billion in the same period last year. Revenue fell from $29 billion to $25 billion. Falling prices are always a big problem for mining companies because of their hefty fixed costs. It wasn't all bad news: Rio's Pilbara iron ore mining operation hit pay dirt, with sales growing 4% to 114m tonnes. That wasn't enough to save its share price, which duly plunged, although it has since made a minor comeback on QE3 and Chinese stimulus.

Chinese arithmetic

Rio Tinto's chief executive Tom Albanese has China on his mind, pinning hopes of a profit revival on the emerging giant recovering later in the year. He is banking on Chinese GDP growth of 8% in 2013 but, with latest figures showing a fall to 7.4%, he might not get it. It all depends on how soon that fresh Chinese stimulus feeds through to infrastructure spending.

Rio Grande

Another worry is that Queensland state in Australia now plans to hike royalty rates on coal production from 10% to 12.5%, fixed for the next 10 years. Rio has warned this will endanger jobs and investment (and profits). Yet none of this should overly worry the long-term investor. In fact, it should encourage them. Commodity stocks are famously cyclical. The daftest thing you can do is buy when prices are at their peak. It's better to steel yourself, and fill your boots when they're out of favour. Trading on a forecast price-to-earnings ratio of 9.4 times earnings for December and yielding a modest 2.9%, now looks like a fair time to scoop a handful of Rio Tinto. If the share price does fall further, you can always grab a bit more of this solid global miner.

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> Harvey owns shares in Royal Dutch Shell. He doesn't own any other shares mentioned in this article.

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