Rio Tinto: Depressed Stock Price Masks Solid Long Opportunity

| About: Rio Tinto (RIO)

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, NYSE: 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 affectively harness its massive cash flows, spending on projects, reducing debt, buying back shares, boosting its payout 32.6 percent on a year-over-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 Jan. 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: CCO, NYSE: CCJ, 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 US, 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 Mr. 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 Mr. 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 Jan. 17. For the half year ending Jun. 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.

Rio's Pilbara iron ore expansion to 283 million metric tons per annum (Mt/a) is on track for completion by the end of 2013. Regulatory approval on the company's proposal to expand Pilbara to 333 Mt/a is expected in early 2012. Rio assumed control of Mozambique-focused coal miner Riversdale upon completion of its on Aug. 1, 2011, while first coal from its Benga project likely to be reported along with full-year 2011 results.

Significant events from the first half of the year include the increase in Rio Tinto's share of Ivanhoe Mines Ltd (TSX: IVN, NYSE: IVN to 46.5 percent. First commercial production from Ivanhoe's Oyu Tolgoi copper-gold project in Mongolia is on track for 2013. Meanwhile the first shipment of iron ore from the Simandou project should occur by mid-2015, after Rio achieved a "settlement agreement" with the Government of Guinea.

Rio boosted its share buyback by USD2 billion to USD7 billion, a process that will be completed by the end of the first quarter of 2012. As of Jun. 30, 2011, the company had purchased for cancellation 44 million shares at a total cost of USD3 billion. Management declared an interim dividend of USD0.54 per share, a 2 percent increase from 2010.

A contracting global economy will affect Super Miners' earnings and share prices, just as it will with every other mining company. And Super Miners aren't always successful with their expansion plans. But, as my colleague Yiannis Mostrous pointed out in Mining Stocks: Be Selective, Rio Tinto is well diversified and its major operations are mostly low-cost. It has one of the strongest balance sheets in the industry, and been steadily reducing its debt. These are the kinds of firms that are in the best position to weather any future storm.

Super Miners are rarely the biggest winners from a rising market, either. But at the end of every cycle they emerge ever-more powerful and ready to move aggressively on the global stage, even as rivals often falter and diminish. The selloff suffered by Rio Tinto in 2011 provides a great opportunity for new money to establish positions in this Aussie bedrock stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.