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I used last summer’s price drop to add red river (LSE:RIO) shares to my investment portfolio. The mining company has rallied from those price levels, but it is still one of the best cheap UK stocks to buy in my opinion.
At £59.70 per share, Rio Tinto is trading with a forward price-earnings (P/E) ratio of 9.9 times. This is comfortably under the FTSE 100 average of about 14 times.
Meanwhile, the commodity colossus boasts a whopping 6.6% dividend yield by 2023. It’s more than double the average of 3.6% for shares in the FTSE index.
3 reasons to buy
There is a valid view that the low valuation of the company reflects the difficult macroeconomic environment. Profits in cyclical companies like this are especially at risk during periods of weak growth, like the current one.
This may be true. But that didn’t stop me from buying Rio Tinto shares last summer.
This is because I invest in UK stocks based on the returns I can get over five to 10 years, maybe longer. And I think Rio Tinto could deliver shareholder returns comfortably above the FTSE 100 average over this period.
Here are three reasons I’m excited about the company today.
#1: The commodity supercycle
The demand for metals, energy and agricultural raw materials grows in line with the world population. This is a trend that dates back to prehistoric times. But market insiders believe consumption could expand particularly strongly over the next decade, generating robust profit growth at miners like Rio Tinto.
Let me provide a couple of examples. Thanks to the green energy transition, demand for metals like aluminum, copper, and cobalt is skyrocketing. Meanwhile, iron ore will be needed in increasing quantities to improve infrastructure and speed up urbanization.
These are all commodities that Rio Tinto produces from its global network of mines and smelters.
#2: Enter fast-growing markets
Buying companies with large balance sheets has an added advantage. Mega miners like this one have the financial strength to invest heavily in exciting market opportunities when they arise.
Rio Tinto has certainly been making good use of its huge cash reserves. In 2021 it entered the scandium market by building a scandium oxide plant in Quebec. The rare-earth metal is used to build fuel cells and as an alloy in the aerospace industry.
Rio Tinto’s acquisition of the Rincon Mining lithium project in Argentina last year is also quite exciting. Demand for battery-making material is expected to rise as electric vehicle sales soar.
#3: World-class assets
I also believe that Rio Tinto’s extensive network of industry-leading assets could help it generate above-market returns.
These include the state-of-the-art Oyu Tolgoi copper mine in Mongolia, in which the company has a 66% stake. This is one of the largest red metal deposits in the world and expansion here will boost the complex’s annual output to 500,000 tonnes a year.
To put this in perspective, Rio Tinto estimates that this is enough to build 1,580 wind turbines or 16,400 electric cars every day.
Rio Tinto is one of my favorite holdings, right? And at current prices I am considering building my position in the mining giant.
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