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Rio Tinto Is as Strong as Iron...Ore That Is

|Includes: ACH, BHP, Rio Tinto plc (RIO)
By Scott Rubin

Rio Tinto (RTP) reported strong first half earnings on August 5 well above Wall Street's estimates, coming in at $5.767 million versus the $5.387 billion estimates the Street was looking for. This was a remarkable 125% year over year growth and as the demand for its main product, iron ore continues to grow, I'd expect Rio to continue to outperform.

The move to the quarterly pricing contracts instead of annual contracts that Rio, along with the other major iron ore producers, agreed upon back in April helped the iron ore division turn a profit of $4.108 billion, significantly higher than the $1.960 billion the company banked a year ago.

As the outlook and demand for base metal commodities continues to strengthen, Rio Tinto has already announced a capex increase of $3 billion so far for multiple projects, including $1 billion for the expansion of Pilbara iron ore in Western Australia and $170 million for the Simandou iron-ore project in Guinea. Next year capital expenditures are expected to reach around $9 billion. Growth around the world is driving Rio Tinto to make these investments and it should pay off in the long run for the company and its shareholders. "Global growth of nearly four percent is predicted by the IMF for both this and next year, with Chinese GDP expected to grow at approximately nine percent," Chief Executive Tom Albanese was quoted as saying in a statement.

Not only are higher commodity prices in favor of owning Rio Tinto, but cost synergies should help the bottom line as well. The company recently announced the expansion of the Simandou iron ore mine with Aluminum Corp. of China (NYSE:ACH) and don't forget its joint venture with BHP Billiton (NYSE:BHP) regarding its iron ore division. This joint venture would save the two companies $10 billion a year in synergies which would all flow to the bottom line.

I believe Rio Tinto's shares are undervalued heavily and I have a price target 12 months out of $65 per share, not including the solid 1.6% dividend yield the company pays you to own it.

Disclosure: no positions in any of the companies mentioned

Disclosure: No positions