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Rio Tinto - Depressed Stock Price Masks Big Opportunities

January 24, 2012 | About:
Immense cash flows enable Super Miners to go further and deeper than anyone else in the mining business, and they produce almost everything from industrial metals such as copper and zinc to metallurgical coal and iron ore used to manufacture steel. No single regulation, tax, political setback or unsuccessful project will bring them down. Governments that nationalize their assets always wind up regretting the decision, suffering lost productivity and profits. And every other company in the industry is a potential takeover target.

Investors remain on hair-trigger alert for any sign of weakness, anywhere. Fear is the dominant emotion, which makes trading in relatively volatile metals and other resources stocks a dicey business. But if you’re looking to establish a long-term position in a high-quality company with solid prospects for dividend growth, you could do worse than to pick up Rio Tinto (ASX: RIO)(RIO) following a year like 2011, when it lost 28.3 percent on a total return basis.

Despite what’s happened in the market, Rio Tinto has continued to effectively harness its massive cash flows and spending on projects, reduce debt and buy back shares, boosting its payout 32.6 percent on a year-over-year basis and generally establishing a foundation for building wealth over the long term.

Global demand for Rio’s key products, including iron ore, copper and aluminum, are forecast to double over the next couple decades, driven by demand from China, India and other economies experiencing rapid industrialization and urbanization.

On January 12, Rio completed the acquisition of Canada-based Hathor Exploration Ltd and its Roughrider uranium project, ending a pursuit that began in November 2011. Rio outbid Cameco Corp (TSX: CCJ) (CCO), for Hathor, whose Athabasca Basin exploration properties in northern Saskatchewan include the flagship Roughrider deposit.

Roughrider holds around 58 million pounds of uranium and has the potential to produce 5 million pounds more of the yellow metal a year. It supplies about a fifth of the world’s uranium.

Rio is already the world’s fourth-largest uranium miner, with annual production of 17 million pounds. The Hathor acquisition gives it a foothold in the Athabasca Basin, home to 20 percent of the world’s uranium production.

Prices for uranium, used to fuel nuclear power plants, had been struggling to recover since Japan’s earthquake/tsunami last March decimated the Fukushima-Daiichi facility. Several countries, most prominently Germany, which was already on course to eliminate nuclear power, as well as France, which is particularly dependent on it and the U.S., to reevaluate their nuclear power programs.

But ever-increasing demand for power in China and India will drive nuclear in coming decades.

Rio’s attempt to challenge Cameco, the king of the uranium heap with annual production of about 22 million pounds, is illustrative of its goal to dominate the commodities it produces. But Canadian law currently prevents Rio from enjoying the output from Roughrider once it does advance from the exploration stage, as foreigners are prevented from owning more than 49 percent of a producing uranium mine. Prime Minister Stephen Harper and his majority Conservative government have expressed their opposition to this policy.

Rio’s takeover of Hathor has cleared Canada’s Competition Bureau but still faces an Investment Canada review, required of all foreign purchases over a certain size. Because its projects are all exploration stage, there are no uranium-specific restrictions on ownership.

Barring a change in the law — not out of the question, given Harper’s recent shift to a more open stance regarding foreign capital flows to Canada — Rio will own 49 percent of one of the most significant uranium resources in the world. That’s the worst case. The upside is Harper and his allies on Parliament Hill successfully roll back what many observers regard as an antiquated Cold War restriction on uranium production.

Rio will report full-year 2011 results on January 17. For the half year ending June 30, 2011, the company reported a 31 percent increase in cash flow to USD12.9 billion. Rio ramped up capital expenditure to USD5.1 billion in the first half of 2011 from USD1.8 billion in the first half of 2010, as it competed for world-class tier-one growth assets.

About the author:

David Dittman
Investing Daily provides stock market advice and investment newsletters to help independent investors achieve a secure and rewarding financial future. The site’s coverage focuses on finding the most profitable emerging trends in the investment universe to bring investors pragmatic and in-depth coverage of the names that are taking advantage of these opportunities.

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