For investors who are seeking a bargain in the basic materials sector, I would suggest increasing exposure to the changes in metal prices through the Anglo-Australian global metals and mining company Rio Tinto PLC (RIO, Financial).
Investors may want to take advantage of the cheap valuation the market has given the stock and the upside the share price is going to experience over the following days. The company announced on Thursday that the board of directors approved a $2.6 billion investment for the development of the Koodaideri iron ore deposit in Western Australia. The approval of the development project is the catalyst investors shouldn’t miss out on since the contribution of this new production hub is going to be a sizeable 14% of the company’s total annual Pilbara iron ore production.
In the Pilbara region of Western Australia, Rio Tinto has established its world-class iron ore business. Koodaideri will upgrade the annual capacity of its operations with 43 million tonnes of iron ore to produce the Pilbara Blend, which is the flagship iron ore product of Rio Tinto.
The company will start building the asset in 2019 and iron ore production is expected to begin in the final quarter of 2021. If the second phase of the expansion project is successful, the annual capacity could increase to over 70 million tonnes of iron ore. A $44 million pre-feasibility study has also been approved by the company. During the first phase of the expansion project, the production hub is expected to deliver competitive rates of internal return and capital intensity per tonne of annual capacity.
“As we pursue our value over volume approach, targeted high-quality investments such as Koodaideri will ensure we continue to deliver value for our shareholders and Australians,” CEO Jean-Sébastien Jacques said.Â
The share price is low as of Wednesday. Following a 1% decline for the 52 weeks through Nov. 28, the share price is now below the 200-, 100- and 50-day simple moving average lines and is only $2.14 above the 52-week low of $45.62. It is 27% below the 52-week high of $60.72.
Rio Tinto, which is one of the world’s largest basic metals producers, has a market capitalization of approximately $78.23 billion. The price-book ratio is 1.45 versus an industry median of 1.74 and the EV-to-EBITDA ratio is 4.96 versus an industry median of 9.3.
These low valuations have pushed the forward dividend yield up to a juicy 5.47% for shareholders of this miner, which has almost three decades of dividend payment history, and widened the deviation with the average target price of $61.50 by nearly 30%, presenting a very interesting opportunity to profit from. Regarding the forward dividend yield, Rio Tinto beats the industry’s median of 3.36%.
The forward dividend yield of 5.47%, however, will likely decline as the share price rises following the approval of the investment for the development of the Koodaideri project. The production hub in Pilbara will be another world-class asset in the company's portfolio.
The asset base is already composed of high-quality mineral deposits and operations that Rio Tinto holds in 35 countries, which have helped the miner to beat most of its competitors in terms of a higher trailing 12-month earnings before interest, taxes, depreciation and amortization margin. In fact, for the last 12 months of operations through the second quarter, the company has delivered an EBITDA margin of 47.4% compared to an industry median of 23%. The strong performance is a result of management’s ongoing focus on significant cost savings, increasing the productivity of assets, disciplined resource management, capturing the highest value in all market conditions and risk management.
Besides iron ore, Rio Tinto also mines and processes gold, copper, aluminium, diamonds, coal, sulphuric acid, lead carbonate, rhenium, selenium and several industrial minerals such as salt, borates and titanium dioxide.
In the third quarter, the company produced 82.5 million tons of iron ore, 12.7 million tons of bauxite, nearly 0.9 million tons of aluminium, about 160,000 tons of mined copper, 297,000 tons of titanium dioxide slag and 2.9 million tons of iron ore pellets and concentrate.
Disclosure: I have no positions in any securities mentioned in this article.
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