Right now I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today I’m looking at Rio Tinto (LSE: RIO) (NYSE: RIO.US)
What is the sustainable competitive advantage?
With over 140 years of history behind it and more than 71,000 people employed in projects across six continents, Rio is the world’s second largest mining and metals company by market capitalization.
In particular, Rio is the world’s second largest producer of iron ore, superseded only by peer Vale.
Still, Rio’s size means that it is able to achieve economies of scale and take on mega-projects that many of its smaller competitors cannot. Indeed, in the current environment where commodity prices are falling due to global economic uncertainty, this trait is highly desirable.
For example, the company ramped up its year-on-year iron ore production by 6%, to 100.1 million tonnes during the first half of 2013, which in turn led to a 2% fall in the production cost per tonne, from $42.4, to $41.6 during 2013.
Unfortunately, Rio lacks the ability to be able to set the selling price for its commodities and has to take the price that is offered by the market, never a good trait in a buy and forget investment.
So, while the company pushed down costs and increased production during the first half of 2013, underlying earnings from iron ore production fell 14%, as the global demand for iron fell.
Moreover, Rio is also unable to control rising costs, which have expanded 11% over the past three-years. This has resulted in the company’s operating profit margin, excluding exceptional items, contracting from 36% during 2010, to 23% during 2012 as costs have risen faster than revenues.
Company’s long-term outlook?
Over the long term, it is likely that Rio will continue to experience rising costs as the constant drive for more output pushes the company to undertake projects in more remote areas.
Having said that, the company is in a better position than most to undertake these projects as Rio’s size allows it to establish economies of scale not available to many of its peers.
Moreover, demand for Rio’s iron ore and copper should only increase over the longer term as the world’s population continues to expand.
Foolish summary
All in all, Rio does not look to be a very good share to buy and forget. While the company is dominant within its industry, Rio is still dependent upon commodity prices and recent multi-billion dollar write-downs highlight the uncertainty currently affecting both the industry and the company.
So overall, I rate Rio Tinto as a poor share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.