Questor share tip: Rio Tinto is a cash generating machine

Rio Tinto held an analyst day in the City yesterday – and Questor managed to grab Tom Albanese, its chief executive, for a quick chat between sessions. Questor says buy.

Rio Tinto
£35.37½ +32½p
Questor says BUY

"From our perspective we are selling everything that we can produce, but to be realistic, physical markets have been seen to be softer. This has been caused by lower levels of business and investor confidence," he said. But Mr Albanese noted particular strength in demand from the aerospace sector and for bulk commodities such as iron ore.

Iron ore prices have moved higher and inventories in China have fallen. This is good news for Rio since the bulk of its profits are coming from iron ore. Broker Liberum is forecasting that 73pc of operating profit will come from iron ore in 2012, with copper 12pc and aluminium 5pc.

Mr Albanese was right to note the impact of confidence on share prices in the sector. Mining shares are some of the most volatile at the moment – and Rio's shares have a "beta" of 1.5. This means that for every 1pc swing in the FTSE 100 – up or down – Rio's shares have been moving 1.5pc. In contrast, more defensive shares such as Unilever have a beta of 0.66.

Yesterday's presentations were about copper – and Mr Albanese said he was excited about prospects in the part of his business. This is positive because copper is in one of the tightest supply and demand dynamics of any of the metals. Also, Rio needs to grow the other parts of its business because iron ore prices are unlikely to remain this high for long.

Rio yesterday also unveiled a 730,000-tonne increase of copper resources at its Kennecott Utah Copper mine in the US.

The price of mining equities has been weak despite the relative resilience of commodity prices. Should there be a massive shock in the eurozone, this will hit commodity prices hard – causing them to plunge just as they did in 2008.

However, despite this risk, the cash generation and medium-term prospects look sound. The shares were originally tipped on May 4 last year at £33.79 and are up just 5pc after the falls compared with a FTSE 100 up 26pc. The yield is just 2.1pc. Buy.