Rio Tinto (RTP): 'Set to play catch up'

Economic activity is increasing across the world., with Asia and emerging markets ahead of the pack, leading the dramatically increasing demand for commodities over the past year.

The major miners are reporting large increases in demand, outstripping production capacity in many cases. That’s great news for mining companies. In fact, the big producers all blew away market expectations in their last reports. But it’s even better news for Rio Tinto Plc (NYSE: RTP).

Based in the U.K., Rio Tinto is a leading international mining group whose major products include aluminum, copper, diamonds, energy, gold, and iron ore.

The company had some difficulty turning around lately. It is saddled with debt from a recent Alcan purchase and well into the process of divesting some assets in order to reduce debt and refocus on its core competencies. But this is precisely why we love the opportunity.

There are huge changes occurring in the global economy. China just surpassed the U.S. to become the largest auto market in the world. With a population of 1.5 billion or more, it was only a matter of time before auto sales in the East overtook the West.

And the auto industry is just an example of what’s to come. Since the beginning of 2008, China effectively has been transitioning from an export-led economy to a con- sumer-led economy. But it’s a gradual process, and China is only at the beginning.

Now, at the same time, India’s economy is ramping up, full steam ahead. It is producing the cheapest car in the world, the Nano, for $2,500. In Bangalore alone, in its first year, it will sell one million units.

Brazil’s economy is also accelerating. The South American country is having a great year as they go into their October presidential elections.

Among the advanced economies, the U.S. and Japan are accelerating. Only Europe is lagging in growth. Hence, with most of the advanced economies accelerating, and the emerging economies already growing at a strong clip (and in many key cases accelerating), the demand for commodities is set to keep increasing strongly.

The environment for commodity price appreciation is decidedly strong. And do not forget the $30 billion reconstruction of Chile… or the billions in foreign aid to reconstruct Haiti.

And then there’s the development of huge oil and gas reserves off the coast of Brazil. That means a huge demand for port infrastructure, offshore rigs, steel pipes, and servicing vessels – all made out of steel. And that’s not all.

Currently, Rio Tinto’s profit margin has hit 11.65%, and its operating margin is at 18.21%. Even more telling is a return on equity of 16.51%. If you think that Rio Tinto’s price of $240 seems expensive… think again.

Vale and BHP Billiton are now approaching their all-time highs. But Rio Tinto’s stock is still well below its price of more than $500 a couple of years ago, when its huge debt and market collapse created major uncertainties.

Of the three mining majors, Rio Tinto is likely to experience the greatest improvement in its bottom line, due to its higher leverage and high operating discipline. What’s more, it is going to benefit from all the positives movement in pricing, volumes, and cost reductions. Get ready for it to play catch up.

Action to Take: Buy Rio Tinto Plc (NYSE:RTP) at market. Use our customary 25% trailing stop to protect your principal and your profits.

Friday, April 30, 2010

by Horacio Márquez, global markets specialist, The Money Map Report