With the iron ore price tumbling to a five year low, its been a challenging period for Rio Tinto (LSE: RIO) (NYSE: RIO.US). Indeed, shares in the iron ore-focused mining company have fallen by 12% during the course of 2014, which is well behind the also disappointing performance of the FTSE 100, which is down 5.5% year-to-date.
However, the long term future of Rio Tinto appears to be very sound and, more importantly, it could help you to retire rich. Heres how.
An Improved Company
A key consequence of the low iron ore price has been a change in Rio Tintos strategy. Indeed, the company has responded positively to a challenging period by cutting costs, becoming more efficient and positioning itself more pragmatically for the long run. For example, Rio Tinto has mothballed several major projects which, thus far, seems to have been the right decision, and now seems to have an even better grip on cost management.
Clearly, there is only so much Rio Tinto can do to improve its business. For it to achieve long term growth it needs demand to pick up sufficiently so that it can command a higher price for the iron ore that it mines and, on this front, there could be a bright future on offer.
Indeed, while Chinese demand is perhaps unlikely to return to previous high levels as a result of it transitioning towards a consumer-led, rather than capital expenditure-led, economy, global demand as a whole should remain robust over the medium to long term. For example, emerging markets continue to grow at a considerable pace and developed markets are also returning to pre-crisis growth levels (Europe aside), so demand for commodities may have reached a low ebb.
Understandably, Rio Tintos share price continues to offer great value due to the challenges the company has faced in recent years. However, the scale of value on offer is quite surprising. For example, Rio Tinto currently trades on a price to earnings (P/E) ratio of just 9.5 (versus 13 for the FTSE 100) and has a well-covered yield of 4.4% (versus 3.5% for the FTSE 100).
Both of these figures show that Rio Tinto offers superb value for money and, while the present time is undoubtedly proving to be challenging, it is in great shape to benefit from an uptick in demand for iron ore over the medium to long term. As a result, Rio Tinto could help you retire rich.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.