Rio Tinto (RIO) has a high-quality suite of tier-1 assets with low-cost, high-quality products. This positions it well for the challenging times ahead.
Rio’s balance sheet is more robust and has lower financial leverage compared to other miners such as Anglo American (AAUKY), Glencore (GLNCY), and Freeport-McMoRan (FCX). This should see it through the cyclical downturn.
Most likely, there will be pressure on cash flows as long as the supply-demand balance isn’t restored in the commodities market with the exit of high-cost capacity.
Operating expenses and capital expenditure flexibility should position Rio Tinto well for the challenging times. As commodity markets rebalance, Rio could outperform its diversified peers such as Anglo and Glencore.
The company’s strategy of approving high-return projects at the trough of the cycle reflects a focus on long-term growth, which could position it competitively ahead of its peers.
RIO’s three recently approved projects, Amrun Bauxite, Oyu Tolgoi underground, and Silvergrass, are high-quality, low-cost projects. These projects give the company an edge over miners with high-cost assets.
The increasing focus on high-quality assets has led miners such as Anglo American (AAUKY) and Glencore (GLNCY) to restructure their portfolios drastically. BHP Billiton’s (BHP) (BBL) assets are also high quality.
Investors who want to avoid the hassles of picking individual stocks can consider the SPDR S&P Metals and Mining ETF (XME) to get exposure to the metals and mining sector. Currently, Freeport-McMoRan forms 3.6% of XME’s portfolio.