I know newspapers are dwelling on the night of the long knife that took Tom Albanese out of the play as CEO of Rio Tinto, but the big issue for me and any trustee of a self-managed super fund is a simple one and that’s: “Is Rio now a buy?”
Or put it another way and with apologies to Peter Allen: “Is it time to go to Rio?”
Regular readers and viewers of my Switzer program know I was talking up both BHP-Billiton and Rio when their share prices sagged on lower commodity prices and reports of a hard landing for China.
I never believed the Chinese doubters, which I argued here, so I took our SMSF long the two big miners mid-year and they helped explain why we made about 27% in 2012. I don’t expect that will always happen and I have to say I made this play because I’m a long-term investor and I knew those low share prices we saw in mid-2012 would look fantastic in a few years time. We got lucky and the future rolled in quicker than I expected. Who would have thought iron ore prices could go from US$80-something a tonne to US$150 a tonne in such a short time?
I didn’t, but I was happy to be a beneficiary.
By the way, I couldn’t make the same play on Fortescue, though it too has benefited, but this is a company whose management I don’t trust. I hold them as a speculative stock and have done OK but Twiggy worries me.
And on the subject of management, Rio, in my opinion has dumped a plodder and mistake maker in New Jersey native, Tom Albanese, and replaced him with a ‘reliable pair of hands’ in someone like Aussie Sam Walsh, who has headed up the iron ore division.
Lately iron ore prices have retreated to around US$145 a tonne and some silly headlines talked about a “price slump” but the more important issue is: is Rio still a buy?
I think so but the gains could be slower than the ones we saw in late 2012.
Positive on Rio
This is why I like Rio:
- Walsh is a cost cutter at a time when mining costs are surging.
- Walsh knows iron ore and China, Rio’s best customer.
- His division has been the most profitable.
- It’s thought he’s a short-term CEO, but don’t count on it — Walsh is competitive and if Rio does well under his watch, the company won’t be in a hurry to lose him.
- Rio is BlackRock’s World Mining Fund’s biggest mining holding and the world’s biggest fund manager rates Walsh highly.
- Rio has put in place new facilities, which will ramp up its production capacity.
- China’s economic growth for the fourth quarter came in at an annual rate of 7.9%, which was better than expected.
- Only three days ago, the World Bank said, “Four years after the onset of the global financial crisis, the worst appears to be over”.
- Most experts on a P/E basis argue that stocks are cheap with the US market at 13 times earnings against a long-term average of 15 times.
- Thomson Reuters says analysts expect a 10.6% increase in corporate earnings this year, which should help the rally.
- Research company Lipper reported the inflow into stock funds, mutual funds and ETFs rose by $18.3 billion in the week ending January 9 and this is the fourth biggest reading since 1992.
- Experts think this will be the year for cyclicals and material stocks such as Rio and BHP Billiton fit the bill.
I think Rio is well-placed to have a couple of good years, helped by the likes of China and other emerging economies, where their modernisation demands the kinds of products that Rio sells. I also think stocks will go higher this year and there will be a shift towards cyclicals, as income-paying stocks look too conservative. And as more money leaves safe harbours such as term deposits, stocks will benefit. I also believe consumers and businesses start spending this year and that will help stocks and companies such as Rio.
Given all this with the bonus of the better Walsh for Albanese CEO swap, I have no fears about going to Rio.
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