Just seven and a half years ago, Rio Tinto (LSE: RIO) was trading at 70 per share. It was in the midst of a commodity boom which was showing little sign of slowing down. China was demanding iron ore hand over fist and its infrastructure and capital expenditure programme was in full flow, with steel being needed in vast quantities.
As such, Rio Tintos bottom line was soaring and investors were happy to pay a high valuation for a company which just five years prior had been as low as 12 per share. The future for Rio Tinto, it seemed, was extremely bright and there was even discussion among some investors as to when, not if, it would reach 100 per share.
Since May 2008, though, Rio Tintos share price has collapsed. In fact, it now stands at under 25, which is a fall of 64% since its 2008 high. This is an improvement, however, on the 21 share price which was recorded at the end of September, with improving investor sentiment being a key reason for the companys 3 per share rise in just ten days.
Clearly, joining the so-called 90% Club is rather unlikely. This would mean Rio Tintos share price falling by 72% from its current level to trade at just 7 (which is 90% lower than its 2008 high of 70).
Although the companys near-term future is rather uncertain and its bottom line is expected to fall by 49% in the current year, trading at 7 per share would mean Rio Tinto having a price to earnings (P/E) ratio of just 4.1 and a price to book value (P/B) ratio of only 0.3. Certainly, its profit may fall further and a highly challenging period may cause asset writedowns but, even still, 7 per share would appear to grossly undervalue the companys long term potential.
In fact, Rio Tinto appears to be one of the most financially sound mining companies in the world and, when combined with an ultra-low cost curve, it seems set to emerge in a stronger position relative to its peers in the long run. This situation is due to be exaggerated by Rio Tintos increased production of iron ore in recent years, with it seeming to be squeezing its less efficient peers so as to put pressure on their financial outlooks. The end result may be a more powerful and more profitable Rio Tinto over the medium to long term.
Undoubtedly, Rio Tintos share price offers good value for money. For example, it has a P/B ratio of only 1.14 which, considering the appeal of its asset base, seems low. Therefore, it would not be surprising for a sector peer to make a bid approach, since combining two major mining companies could create an even lower cost operation which would be likely to benefit from economies of scale, improved margins and add a great deal of shareholder value.
So, while Rio Tinto has disappointed in recent years, it seems to be very unlikely to join the 90% Club. Rather, it appears to be well-worth buying right now ahead of a period of huge long term capital gain potential.
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