Over the past few years, it would be hard not to notice the incessant array of "we buy gold" ads that have been bombarding television, radio, and even street corners by way of a waving, sign-holding individual - and there is a very good reason for this. Although gold and other precious metals have always been good stable investments, the past few years of market instability have embedded this notion even further into investors' minds.
Many investors have been turning to metals in order to help balance out and stabilize their portfolios - and in most cases, it has paid off nicely. Given the forward movement in metals prices, it is anticipated by some that there may soon be an overall bull market for the mining and metals industry as a whole.
With this in mind, there are some metals companies that may fare better than others. One such company is Rio Tinto (RIO). In this article, I will discuss why I feel that Rio Tinto could be an excellent piece of any portfolio based on its substantial growth potential.
Rio Tinto focuses on both the mining and the processing of mineral resources on a worldwide basis. The company utilizes both underground and open pit mines, mills, smelters, and refineries. Some of the firm's key operations are located in North and South America, as well as in Australia, Europe, southern Africa, and Asia.
Although the dividend of $1.45 per share offers investors a somewhat conservative yield of just over 3%, share price is expected to rise by more than 67% over the next 12 months. One reason for this may be the company's diversification away from iron ore - which is a positive move in light of recent raises in royalty rates that are being charged to miners in Australia, as well as a recent fall in the price of copper, iron ore, and aluminum.
Even as income growth has declined, over the past 12 months, Rio Tinto has still seen an increase in sales growth of just under 10%, as well as a rise of over 8% in its net profits. With the demand for commodities bottoming out in China, it is expected that metals prices will start to come back up - and in some cases with the inability to be met with a higher supply and thus raising prices as a result.
Given this anticipation, Rio has an expected growth in earnings per share for 2013 of over 18%, and a forward P/E ratio of roughly 6.4. With this in mind, I feel that this could signal a great time to pick up additional shares of Rio - especially if they can be purchased in the $45 range.
Other Potential Shiny Metals Plays
Another mining company that should be considered is Silver Wheaton (SLW). This firm operates a worldwide silver streaming company. With a market cap in excess of $14 billion, Silver Wheaton has rewarded its investors in 2012 year-to-date with an increase in share price of nearly 37%.
One big reason for this increase is the firm's increased gross profit margin that is in excess of 85%. This is substantially higher as compared to other companies in the sector. In addition, Silver Wheaton's cash flow from net operations also increased by nearly 2.75%, or over $170 billion for 2012's second quarter in comparison to the same quarter of the year prior.
Goldcorp (GG) is also benefiting from the unstable worldwide economy, as well as via the U.S. government's quantitative easing initiative, or QE3, and a potential for economic stimulus from banks around the globe. Although, because Goldcorp's focus is less diversified in terms of metals, the potential for gold price to drop prior to moving back up again may be a signal for investors to hold off for just a while before adding shares of this mining company. If timed correctly, though, Goldcorp could be a very good value at $40 per share or lower.
Similarly, Agnico-Eagle Mines (AEM) also operates gold mines in numerous worldwide locations - primarily in Canada and Mexico. Currently, with Canada's higher wage production costs, investors may want to wait on this one. Although fewer stringent regulations in the company's mine operations in Mexico could offset this. In any case, the company offers a solid dividend yield of just under 1.6%, so investors could receive income while waiting for a rise in share price.
Likewise, the Pueblo Viejo mining plant owned by Barrick Gold (ABX), with its recent start of production, may make this mining company another possibility for investors seeking value from this sector. This new plant is expected to produce between 625,000 and 675,000 ounces of gold over the next five years. In addition, the company's new CEO is focusing on some key goals that include redirecting Barrick to drive returns as the development costs at some of the firm's other operations continue to increase.
The Bottom Line
While there are several potential values in the mining sector, I feel that Rio Tinto could offer investors the best opportunity for significant share growth - especially if the firm can overcome some of its current challenges in the area of increased Australian royalty rates and falling prices in some of its mined minerals.
In addition, the respectable dividend yield of over 3% may also make the shares of Rio even more attractive as this yield is still quite a bit higher than that of Treasuries, and even in comparison to the dividend yield of several of Rio's mining industry competitors.
For investors who hold shares of Rio, the near term road may see a few up and down bumps along the way - but I feel that in the longer term, hanging on to these shares will be well worth the ride. While I think analyst's predictions of a 67% gain over the next 12 months is overdone, I don't think a 40 to 50% rise is out of the question.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.