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Can Rio Tinto turn itself around?

Rio Tinto announces full-year figures on Thursday 7 August. Earnings are expected to shrink by around 10%, while growth is set to rebound in the following year.

A mine worker walks past a train loader at Rio Tinto Group's iron ore mine
Source: Bloomberg

Rio Tinto has not had the easiest few years. Metals demand has slipped back as production has risen, while the emerging markets on which the company depends have seen growth stall. China may still be powering ahead relative to the west, but the massive stimulus programmes that bred demand for raw materials are a thing of the past.

Even so, the current outlook for the company seems improved. Emerging market demand is forecast to rebound, allowing an increase in profitability, while income investors will be pleased to note that the dividend is expected to rise as well, increasing by 8% this year.

On a current year price-earnings ratio of 11.5, Rio is cheaper on valuation grounds than the rest of the sector, whose median PE stands at around 12 (while the FTSE 100’s PE is 13.8), while its dividend yield of 3.4% is higher than average. Mining companies are not traditionally a favourite of income investors, thanks to the more volatile nature of their profits, but on this basis Rio looks to be a more solid proposition.

Rio is stuck in a long-term downtrend from the highs stock saw way back in April 2008. So far this year, the miner has returned -1%, while the FTSE 100 is 0.6% down. Each attempt to break through this trendline – and there have been three such tries – has been repulsed. The latest took place right at the end of July, and saw the price approach £35. A break through the long-term downtrend, currently around £34.70, would be a very positive sign, but ideally the 2014 high of around £36.80 needs to be broken for a real turnaround to develop.

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