The fortunes of investors in Rio Tinto Limited (ASX: RIO) and Newcrest Mining Limited (ASX: NCM) have been very different during the last year. While the latter has posted a flat share price performance, thereby outperforming the majority of the resources sector, the former has seen its shares slump by 17% as a declining iron ore price has hurt its top and bottom lines.
In fact, even Rio Tinto's strategy to boost production and lower its costs through becoming more efficient has only done so much to help. As the company recently reported, its underlying earnings fell by around 43% versus the comparable six month period from 2014. However, it remains one of the most financially sound and well-run mining stocks in the world and, while further declines in the price of iron ore would undoubtedly hurt its bottom line further, Rio Tinto has huge investment appeal.
A key reason for this is bid potential. Although the Aussie government has previously stated that they would not allow a takeover of Rio Tinto, rumours persist regarding a possible offer from sector peer, Glencore. And, with Rio Tinto trading on a forward price to earnings (P/E) ratio of 17.9 and being expected to increase its earnings by over 10% next financial year, it appears as though now could be a great time for a potential suitor to make a bid.
Meanwhile, for income investors, Rio Tinto offers a superior yield to the ASX, with the former yielding 5.1% versus 4.6% for the latter. Additionally, Rio Tinto confirmed at its recent update that dividends remain a priority and are very sustainable – as evidenced by a forecast coverage ratio of 1.15 in financial year 2016.
Of course, Newcrest Mining does not pay a dividend and is not expected to do so in the current year. However, its financial performance is set to trump that of Rio Tinto in the short to medium term, with the company having made a number of changes to its cost base and business model so as to make itself increasingly efficient and robust.
These changes, plus a milder fall in the price of gold compared to iron ore, mean that Newcrest's earnings growth forecasts of almost 33% per annum over the next two years are well ahead of Rio Tinto's growth prospects. And, with Newcrest having a price to earnings growth (PEG) ratio of 0.52, it offers superior value to Rio Tinto's PEG ratio of 1.77 at the present time.
Despite its superior growth prospects and keener valuation, though, Newcrest Mining lacks the financial standing, size and scale of Rio Tinto. This could prove to be invaluable in the current weak climate for commodity prices and, while the price of gold has held up much better than most other commodities in recent months, it recently hit a five-year low. Further, with the outlook for the global financial system being less downbeat than it was a number of months ago, demand for a store of value could disappoint somewhat moving forward. As such, if you can buy only one or the other, Rio Tinto appears to be the preferred option, with its dividend and bid potential being key draws for new investors.
