The recent commodity slump has added some red ink to a lot of private investor portfolios, including mine. Yet now could be a good time to buy for contrarian value investors. After such severe declines, surely there are some bargains on offer?
In my view, the only way to acceptably offset this risk is to ensure that a company has top quality assets that can be operated at very low cost. A modest valuation, strong balance sheet and decent dividend history are also essential, in order to improve the odds of above-average long-term returns.
The company also needs to be large enough to ensure good access to funds at attractive rates, in all foreseeable market conditions.
My view is that a company ticking all of these boxes ought to have a high QV (Quality & Value) Rank and could be provide an attractive entry point. To put this to the test, I hunted through the top-ranked stocks in the Energy and Basic Materials sectors on Stockopedia.
Enter Rio
Unsurprisingly, there were not many companies which matched my criteria. One of the few that did was Australian iron ore giant Rio Tinto, which is a holding in my long-term income portfolio.
Rio’s iron ore reserves are amongst the largest and cheapest to mine in the world. As an indicator of scale, the firm’s Pilbara iron ore operations include 190 locomotives, 1,700km of rail and three ports, along with 15 mines. Rio expects to move 1 billion tonnes of rock and to ship 340m tonnes of iron ore in 2015.
Operating costs are impressive, too. During the second half of last year, the Rio’s cash unit cost for iron ore fell to just $18.70/tonne. With iron ore prices currently at about $50/t, there’s no risk of Rio losing money on iron ore.
Rio has pushed ahead with production growth on the basis that higher-cost producers should withdraw if demand is insufficient. That’s the same argument used by OPEC oil producers like Saudi Arabia and Iraq, and makes good sense to me.
I intend to add to my holding in the near future. In my opinion, Rio meets all…
