Commodity markets turning the corner?
Persistent fears over the pace of the global economic recovery, and subsequently demand projections in the iron ore market, has caused Rio Tintos share price to oscillate wildly in recent times. The firm generates more than three-quarters of total earnings from the material, so fears of a worsening supply/demand balance here has cast doubt on Rio Tintos growth prospects.
But the steelmaking material is anticipated to stabilise thereafter, averaging $95 through to the close of 2017 before rising back to $100. Although not ideal, the prospect of a bottoming-out iron market is clearly a relief for investors.
Meanwhile, Bank of America also expects the Rio Tintos other key markets to recover in coming years. Copper which is the firms second most important commodity and responsible for 11% of earnings is expected to linger around $7,000 per tonne before leaping to average $8,250 in 2017. And aluminium, responsible for a tenth of group earnings, is expected to rise from $1,886 per tonne this year to $2,010 in 2015 before marching to $2,200 and $2,355 in 2017.
And in the meantime, Rio Tintos extensive asset shedding and cost-cutting scheme is proving critical in boosting the firms earnings outlook in light of persistent commodity price weakness. The business announced last month that it achieved its $3bn operating cash cost reduction goal six months ahead of target, while its stake in the Panguna copper mine in Papua New Guinea is the latest project to go under the hammer.
A dirt-cheap growth selection
The effect of volatile commodities prices during the past five years has prohibited Rio Tintos earnings performance to gain any sort of traction, and despite 2013s solid 10% rise City analysts expect further turmoil in the near-term.
Indeed, the mining giant is anticipated to experience a 7% earnings dip in the current 12-month period, to 316p per share, although the effect of severe restructuring is expected to yield a 7% bounceback next year to 337.8p.
However, it could be argued that the muddy outlook for commodity markets with still-soggy global demand outpaced by new capacity coming flowing into the market is currently baked into Rio Tintos share price.
Indeed, the company is currently trading on a P/E rating of 10.2 times predicted earnings for this year just above the bargain threshold of 10 or below and which drops to just 9.2 for 2015. For risk-tolerant investors this could provide an excellent entry point.
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Royston Wild 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.