Rio Tinto £34.90 +16½p Questor says BUY
Iron ore prices have risen by 83pc since September, giving shares of Rio Tinto an impressive boost. The world's third largest miner plans to increase output of the steel making ingredient by 15pc this year.
Iron ore is Rio's most significant commodity. It makes up almost 70pc of the group's operating profit and the miner has some of the lowest production costs of any producer.
Rio mined 253m tons of iron ore during 2012, up from 245m tons in 2011. The figure was a touch ahead of guidance of 250m tons. Rio did not roll back on its expansion plans last year, despite a slump in prices, and it should feel the benefit of this steady hand this year.
Of course, a sharp spike in prices is likely to result in some Chinese steel mills thinking twice about buying. The price rise also means that Chinese iron ore is now cheaper than imported ore from Australia and Brazil. However, Chinese iron ore is of low quality and is expensive to process, that's why the country's steel mills still buy the more costly ore that has been shipped halfway across the world. Still, domestic supply could be limited because of cold weather in the Northern Chinese mines, which should support the price of imports.
Iron ore prices hit $158.50 a ton in China last week after slumping to a low of $86.50 in September on concerns the country's economy could suffer a hard landing. The price has now rebounded ahead of an expected increase in production as the new Beijing government reignites infrastructure spending.
Indeed, Chinese imports hit a record last year, rising 8.4pc to 743.55m tons, according to domestic customs data. With GDP expected to grow to more than 8pc this year, another year of record imports is in prospect.
Rio's copper operations also continue to show an improvement. Total (NYSE: TOT - news) mined copper production for 2012 was up 6pc year on year, due to expected recovery in the quality of copper at its mines at Kennecott Utah Copper and Escondida in Chile. The group's massive Oyu Tolgoi copper mine in Mongolia is expected to start commercial production in the middle of the year, so output should increase substantially this year and next.
Rio also produces thermal coal, uranium, titanium and diamonds. Production was more or less in line with expectations.
Rio has said that it is reviewing its diamond business, as it aims to focus on its core commodities of iron ore, copper and coal. The assets include the 100pcowned Argyle mine in Australia, which produces pink diamonds, a 60pc stake in the Diavik mine in Canada and 78pc of the Murowa mine in Zimbabwe.
Earlier this week, US group Harry Winston Diamond Corp sold its luxury retail unit to Swiss group Swatch. Harry Winston owns the other 40pc of the Diavik mine and its chief executive, Robert A Gannicott, said that it may be interested in buying Rio's stake because it now has cash to spend.
"We are aware that Rio Tinto wants to sell its interest in the Diavik mine ...
that's an obvious one for us to look at as long as the price is right," Mr Gannicott, said.
However, there has been some speculation that Rio could spin off its diamond assets, which include marketing and processing operations, into a separate company listed in London.
All in all these production figures look good and Rio is ideally positioned for a year that is likely to be far better for miners than the previous one. The shares are trading on a 2013 multiple of 9.9 times and the prospective yield is 3pc. Questor maintains a buy rating on the shares.