The last few years have been tough for investors in Rio Tinto Limited (ASX: RIO). The company's top and bottom lines have come under severe pressure due to an iron ore price which has fallen to a ten-year low. And, while China may introduce additional stimulus following its cutting of interest rates, it appears likely that a supply/demand imbalance for the steel making ingredient will remain over the short term.
As a result, Rio Tinto's bottom line is set to disappoint in the current year and, with the company's shares being at the same level as they were three years ago, investors in the company have had little to shout about. In fact, investor sentiment in Rio Tinto (and in the wider mining sector) appears to be weak, with many investors questioning the merits of investing at the present time.
However, I'm bullish on the sector and, more specifically, on Rio Tinto for these three reasons.
Strategy
Rio Tinto's strategy of increasing production at a time when prices are depressed is a sound move. Certainly, it has been argued that it has added a downward pressure on the price of iron ore and, while this may be true, Rio Tinto has correctly sought to strengthen its own position through increasing supply.
Not only has this allowed it to post profits that otherwise would have been lower, it has strengthened the company's position versus a number of its peers who do not enjoy a cost base that is as low as that of Rio Tinto. As such, Rio Tinto appears to be ready to emerge from the current period of depressed iron ore prices in a much stronger position relative to its rivals.
Sustainability
As touched upon above, Rio Tinto has an exceptionally low cost base, which provides it with relatively healthy margins and means that it is among the most sustainable mining companies on the ASX. This low cost curve has been achieved through generating considerable efficiencies in recent years, as well as leveraging the company's size and scale.
And, with Rio Tinto having a strong balance sheet (with a debt to equity ratio of just 46%) and excellent cash flow so as to be able to sufficiently invest in the long term capability of the business (net operating cash flow has averaged US$13bn per annum during the last three years), its future appears to be secure.
Value
Although Rio Tinto continues to trade at a premium to its net asset value, a price to book (P/B) ratio of 1.75 indicates good value for money. Certainly, it may be higher than the mining sector average of 0.65, but Rio Tinto offers a degree of stability and sustainability that few of its peers can match.
Furthermore, with the global economy continuing to move from strength to strength, it would be of little surprise for demand for iron ore to increase over the medium term. And, with Rio Tinto's bottom line set to return to growth as early as next financial year, its valuation has scope to expand over the medium term.
