Today I have opened a first position in Rio Tinto $RIO opened.
I had the company on my watchlist for a while. At the current price, it seems like a good entry opportunity to me. The price has dropped almost 25% since January and is now at about 2019 levels.
Rio Tinto operates mines around the world, extracting iron ore, aluminum, copper and other minerals. The business is cyclical, as it is highly dependent on current commodity prices. Although I usually avoid "cyclicals", I have decided to add them to my portfolio. $RIO into my portfolio.
Investment thesis:
- the company is strong Cash flow positive. However, cash flow is subject to a certain cyclicality. The current free cash flow yield is 9.3%.
- One of the KPI's (Key Performance Indicator) for the management of Rio Tinto is the ROCE, so efficient use of capital is emphasized there. ROCE in recent years has fluctuated between 20% and 44%; in 2022, ROCE was 25%. So we are currently rather at the lower end.
- Commodities are always
and in the future the demand could increase further. increaseas investments in renewable energy and electrification of transport are likely to increase demand for iron, aluminum, copper and other minerals. - Rio Tinto has a large network and diversification through its global presence. New competitors have a difficult time in this market, as they can only obtain new mines through government licenses.
This is something to keep in mind:
- as the level of cash flow is highly dependent on commodity prices, I also expect some cyclicality in profitability in the future.
- Rio Tinto's dividends also fluctuate due to the cyclicality of the business model. However, even in very good years, Rio Tinto gives its shareholders a disproportionately good share through a high dividend and/or share buybacks. Personally, I can live with the fluctuations here.
The price can certainly fall a little further. Nevertheless, I also see some upside potential here due to the expected higher demand I described. Even if it is not a price rocket, Rio Tinto at least gives me a royal share of the profits through the dividends paid out.
