Today I am looking at why Rio Tinto (LSE: RIO) (NYSE: RIO.US) could prove a canny investment.
Here are two numbers that I think help make the case.
1.6
Latest data released yesterday from the world’s factory floor of China showed consumer price inflation (CPI) remain flat on an annualised basis in October, at just 1.6%. The Asian Dragon has not seen inflation run at such low levels since January 2010, prompting many to speculate that Beijing could be on the verge of fresh stimulus to kick-start the domestic economy.
With doubts gathering pace that the Chinese government will fail to meet its 7.5% annual GDP growth target — latest quarterly data showed the economy rise 7.3% in July-September, the slowest rate of expansion for five years — policymakers may have no choice but to splash the cash once more. And as inflation continues to drag, it certainly cannot be argued that the Chinese central bank lacks sufficient wiggle room to act.
This scenario bodes well for commodities demand, meaning the likes of Rio Tinto could experience a resulting revenues bounce. In particular, the mining giant’s extensive iron ore operations — which account for around 75% of total profits — are dependent upon demand from Chinese steel mills. China is responsible for around two-thirds of total iron ore consumption.
566 million
At the same time, Rio Tinto is also making tremendous progress in streamlining the business and beefing up the balance sheet, a critical quality given enduring uncertainty surrounding supply/demand imbalances — and consequently prices — across commodity markets.
Indeed, the mining firm’s rolling drive to scale back unnecessary capital outflows and prioritise long-life and low-cost assets saw exploration expenditure before taxes and divestments drop to $566m during January-September, down from $774m during the corresponding 2013 period.
And Rio Tinto’s focus on only its most profitable assets is likely to see it continue to offloading non-core projects to boost the cash pile and de-risk the business. The company raised $3.5bn last year through asset sales, and following a slowdown during the start 2014 has got its scheme rolling again with the sale of its Mozambique coal operations.
These measures should give the business greater flexibility to ride out current cyclical woes across commodities sectors and leave it in a stronger position to generate strong earnings growth in the long term.