October 31, 2011 - Rio Tinto plc (RIO-NYSE) engages in finding, mining, and processing mineral resources. The company produces aluminum products, including bauxite, alumina, and aluminium; copper, gold, molybdenum, silver, and nickel, as well as sulphuric acid; diamonds; industrial minerals, such as borates, titanium dioxide feedstocks, talc, high purity iron, salt, metal powders, zircon, and rutile; thermal and coking coal, and uranium; and iron ore.

This is a major, global company with a market cap of $101 billion. It's digging in the earth, 24 hours a day, 7 days a week, extracting essential minerals and metals for the industrial world or finding new energy assets in coal fields or uranium mines. If you think commodity prices are going higher, then RIO will be of interest.

Earnings took a dip in 2009 (as they did with almost all companies). But they more than bounced back in 2010, going from $3.01 to $7.31, up 143%. This year, 6 analysts have a consensus estimate of $8.86, then forecast $9.53 for 2012. With the stock trading at $52 as of this writing, that makes the Forward P/E less than 6. In 2008, the stock hit an all-time high of $139.70 (all prices adjusted for a 4 for 1 split in early 2010).

For the first six months of this year, revenues were higher by 15%, going to $29.05 billion, up from $25.21 billion in 2010 in the same period. The main reason: higher prices for commodities,especially copper which is a necessity for most construction projects. Iron ore was a little weaker due to difficult weather, curtailing production. Most analysts see continued solid demand for the rest of 2011 and into 2012 for most of the commodities RIO delivers as the global economy has regions that are quite strong (China, Brazil, and India in particular).

On the operating side, costs could go higher as prices for fuel and other essential raw materials that are part of mining continue to climb. Labor costs increased in the first half of the year, and the difficult weather that hampered production of iron ore also created more maintenance expenses.

As mentioned above, this is a large company and most of its numbers are big. Cash, for example, sits at $7.84 billion for $4.07 a share. Revenues were $61.09 billion for the last 12 months. Net income was $16.09 billion for the last 12 months. Total debt is $18.18 billion but debt to equity is 26% which gives the company plenty of room to grow. Sometimes size matters. In this particular industry, it matters a lot since projects can run into the billions of dollars.

Rio is investing in the ground with new projects in several mining businesses. It's developing and expanding into new commodities. It's also investing in itself having bought back a large amount of its own stock and will increase its buyback program to shrink outstanding stock even more.

Over the last few months, the stock faltered, going from $76.70 to $40.50. Investors were most likely concerned that a global economic recovery is not as certain as they thought earlier this year. If that's true, then commodity demand will diminish. How long this perception lasts will determine which way RIO's stock price will go. The fact that the price has risen 30% in the last few weeks suggests investors are feeling a little more optimistic.

Essential Numbers:
- Forward P/E 5.5
- Price to sales: 1.72
- Price to book: 1.67
- Operating margin: 36.63%
- Profit margin: 26.30%
- Return on equity: 29%
- Return on assets: 13%
- Current ratio: 1.57
- Book Value per share: $32.62
- Beta: 1.63
- 52 week change: - 17.5%
- Shares Oustanding: 1.93 billion
- Float: 1.36 billion
- Dividend: $1.07
- Yield: 2.1%

There's a new use for copper that could send demand soaring: it turns out copper kills bacteria on contact. That means hospitals will most likely be installing it on many surface areas. That's a whole new market. And if more global economies can gain traction, new construction will shortly follow. Expect better earnings for RIO for several more years.

- Company Web site: www.riotinto.com

    Ted Allrich