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Stock of the week: Rio Tinto

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Graham Spooner, investment research analyst at The Share Centre, picks FTSE 100 giant Rio Tinto as stock of the week.

Mining giant Rio Tinto may be UK-based, but its operations make it truly a global company. The group’s main operations are for iron ore as well as interests in aluminium, copper, gold, diamond and lead, with the majority of earnings generated from the base metal side of the group. Interested investors should note that by being one of the lowest cost producers, Rio Tinto’s management believes the group should be better positioned to ride out the lower price environment than some of its peers.

The 2016 full year results have shown that operational performance combined with a more conservative balance sheet have allowed the company to steer well through the depressed price environment. Group revenues fell by $1bn to $33.8bn but underlying earnings rose by 12% to $5.1bn while the net debt fell by 30% to $9.6bn. Income seekers should appreciate that this good performance has allowed management to raise the full year dividend materially ahead of expectations and announce a $500m share buyback programme.

Encouragingly, the company remains convinced of the strength of the long term demand outlook, despite the short term uncertainties. Rio Tinto expects global steel demand to rise by 2.5% a year until 2030. Therefore, it’s keen on progressing with current major investment projects, along with cost cutting measures. The group’s planned expansion projects indicate that the group will continue to focus on its core business of extracting iron ore. We continue with our Buy recommendation for investors looking for a balanced return and willing to accept a medium to higher level of risk.

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