Rio Tinto's single-commodity exposure not a bad thing, says Investec

19th Aug 2014 09:43

Rio Tinto's heavy exposure to iron ore shouldn't necessarily be seen by the market as a bad thing, according to Investec.The broker has maintained its 'hold' rating for the stock, but hiked its target price from 3,220p to 3,552p.Investec analyst Hunter Hillcoat said that the miner's single-commodity exposure is "often portrayed as a weakness". However, he said that the iron ore division's "exaggerated operating margins" means that Rio Tinto has the capacity to withstand high price volatility. Iron ore margins are running at 60-70% this decade, twice that of other commodity classes."Barring a collapse in iron ore prices, this provides it with a great deal more earnings surety than more diversified peers, which rely on commodity divisions with smaller operating margins and therefore greater earnings volatility."This certainty means that Rio Tinto can confidently predict "markedly increased cash returns" to shareholders, Hillcoat said.Even under bearish commodity-price assumptions, the analyst reckons that Rio Tinto can employ a progressive dividend policy with the payout ratio - the proportion of earnings paid out as dividends - rising from 35% to around 42%.Furthermore, excess cash generated could also be used for buybacks given that net debt is now at targeted levels.The shares were trading 0.2% higher at 3,418p by 10:14.BC