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Rio Tinto (RIO) – Finals PTP: $9.8bn ($10.2bn) Divi: 84c (64c)

The song remains the same. Another year of record earnings and cashflow on higher production volumes and better selling prices. Investment has been made into new reserves while cost pressures bite.

Rio is at a crossroads. Commodity prices have become volatile, global economies are weakening and corporate consolidation is distracting management as energy is ploughed into offensive and defensive communication.

The future of Rio can go in several directions. BHP Billiton (BLT) could buy it outright. It could be broken up, with major shareholders Chinalco and Alcoa getting the aluminium assets, including Alcan, which Rio bought last year, and BHP getting the iron ore. Or Rio continues on its own. Although Rio has indicated it would be open to a takeover at the right price, it could still stay independent.

Rio has not downed its tools to fight off BHP. It is reducing overheads and investing in new mining technology. To repay $38 billion of debt from the Alcan acquisition, it will use cashflow, currently running at over $1 billion per month, and sell $15 billion worth of assets. The proceedings have already started with the $750 million sale of metals mine Green Creek.

The market fundamentals haven’t drastically changed, so Rio should continue to do well. Vivek Tulpule, Rio’s chief economist, believes growth in China – one of the biggest commodity users – shouldn’t be too affected by a further slowdown in US economic activity. Industry disruptions including power problems and labour issues are a big threat to new mining projects, reducing the risk of a sudden spike in new supply that would weaken selling prices.

Shares says: It’s fine to take some profit on the BHP-driven price strength, but keep your foot in the door as this is an attractive long-term investment.

by: Dan Coatsworth