Given the afflicted state of the commodity sector, most investors will be quietly relieved with the mixed bag of results just posted by Rio Tinto (LSE: RIO). It certainly spared the iron ore miner yet another handbaggingby stock markets, its share price broadly flat at time of writing.
Chief executive Sam Walsh saysefficient production, rigorous cost control and sound allocation of capital have helped the companygenerate substantial free cash flow inchallenging times, confirming my view that this is a good company in a bad sector. Dont blame it on Rio. Its strategy of ramping up production to offset falling prices, with Q3 production up 14% year-on-year, may be controversial but is hard to argue against. Whats the alternative?
Copper production is less important to Rio but the 24% drop in mined copper to 115 kilotonnes, still hurts. Although Rio insistsit is still on target to hit full-year guidance.
So, nothing earth shattering. Investors will be cheered by Walshs claim that the balance sheet has been strengthened by cost cutting and his promise to deliver strongshareholder returns in future. But we all know that what Rio Tinto investors really want to see is an increase in commodity prices, and they arent getting that whilethe flow of Chinese bad news continues.
What they are getting is a soundly run company trading at just 7.72 times earnings, and yielding 5.37%. That yieldisnt set in stone: another year or two of slowing China and falling metals prices will eventually sink it.
It is a similar story at BHP Billiton (LSE: BLT). It yields a staggering 7.16% who would have imagined that five years ago after plunging 25% in the past year. Over five years, it is down 44%. Such long-term underperformance shows exactly how much it hurts when a super-cycle turns against you. Contrarian buyers who bought into commodities tooearly will regret acting in haste.
With Chinese imports falling by amassive 20.4% in September, it really feels too early to call the end of the downswing. It also seems to early to talk about buying BHP Billiton, which trades at arelatively pricey 14.68times earnings. Morgan Stanley was recently talking upa 19% upswing in commodity prices by 2017, but that looks like a leap of faith from where we are now. I am all in favour of contrarian purchases but I have learned the hard way that it takes time for all the bad news to flush out.
Not My Bag
The problems afflictingChinas shadow banking system, the unfathomable depth of its bad debts and fallout from its runaway property boom have barely begun to be exposed. Yet another bout of stimulus may cover up the cracks, but this trick is getting harder to pull off.
My worry is that all the overheated talk about a commodity supercyclehas given investors unrealistic expectations, and they see the current slowdown as abnormal, when I see it more as the new normal. China wont post double-digit GDP growth again. Itsbreakneck pace of infrastructure growth is neither repeatable, or desirable. And I dont see who else will pick up the slack.
Buy BHP Billiton and Rio Tinto for their stunning income, and hope it can be sustained. The future still looks like a mixed bag to me.
There are plenty more mineral-rich investment prospects on the FTSE 100, if you know where to find them.
The latest FREE wealth creation report from Motley Fool will help your quest by picking out5 of the best FTSE 100 stocks you can buy today.
All five stocks are ideally placed to deliver long-term wealth over the years ahead.
To find out their names and see how they could help you secure a comfortable retirement, simply download the documentThe Motley Fool’s 5 Shares To Retire On.
Harvey Jones 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.