Turnaround Expert Mines for Value at Rio Tinto

01/07/2016 10:00 am EST


George Putnam

Editor, The Turnaround Letter

This UK-based company began operating in 1873—when the company was formed—to re-open ancient copper mines along Spain’s "Red River," notes George Putnam, editor of The Turnaround Letter.

Over the ensuing years the company developed or acquired numerous mining operations around the globe, so that today it is one of the world’s largest producers of iron ore, aluminum and bauxite, copper, and coal. 

Its operations are spread over six continents, with 50% of its assets in Australia and 29% in North America.

Rio Tinto (RIO) was a major beneficiary of massive demand for metals and minerals from China over the last decade, which drove the stock to a peak of $139 in 2007. 

As China has cut back on capital spending, global metals and commodities prices have declined precipitously. 

Although we’re not smart enough to predict exactly when natural resource and metals prices will begin to rebound, we do know that Rio Tinto will be a major beneficiary when that happens. 

Moreover, it has the global scale and the financial resources to prosper—albeit at reduced levels—even if the industry downturn continues for many years.

The company is one of the lowest cost producers in each of its business segments and it is working to reduce its production costs even further. 

Most of Rio Tinto’s facilities are profitable even at current low market prices.  This will allow the company to not just survive but to gain market share as higher cost producers fail.

Increasing global growth will eventually cause commodity prices to rise again, and when that happens, Rio Tinto’s stock price will appreciate handsomely. 

In the meantime, the substantial dividend—yielding an estimated 7.4%—compensates you while you wait. 

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