Rio Tinto Back to Neutral

On Feb 21, we upgraded metal mining giant, Rio Tinto Plc. ( RIO - Analyst Report ) to Neutral based on its improved prospects. Rio Tinto, which focuses on the lucrative minerals market, was upgraded shortly after reporting impressive production as well as revenue data for full year 2012.

Why Neutral?

We downgraded Rio to Underperform on Jan 22. However, we are upgrading our recommendation back to Neutral for the stock due to an improvement in the production status of the company. Rio reported improved year-over-year production for 2012 for some of its products like iron ore, energy and aluminium.

The acquisition and divestiture strategies that Rio undertakes are also proving beneficial for it. With the acquisitions of Turquoise Hill Resources Ltd. as well as Richards Bay Minerals in 2012, Rio expects to benefit a great deal. Also, in December 2012, Rio sold off its stake in the Palabora Mining Company Limited, to focus more on the productive areas.

Also, the company announced improvements in its cost structure for 2012 with a target to achieve cost savings to the tune of $5.0 billion by 2015. This will lead to a cost saving of $3.0 billion annually by 2014.

Moreover, the company also plans to reduce its capital expenditure for 2013 to $13.0 billion from the $17.4 billion spent in 2012. This reduction will help the company boost up the free cash flow, thereby increasing the shareholder returns. In view of the increased production of iron ore as well as a recovery in the copper volumes, management also increased the 2012 dividend by 15% to $1.67 per share.

Other Stocks to Consider

Apart from Rio Tinto, other stocks in the mining sector that are currently performing well include Denison Mines Corp. ( DNN - Snapshot Report ) , Commercial Metals Company ( CMC - Snapshot Report ) and Xstrata Plc. ( XSRAY ) . All these companies carry a Zacks Rank #2 (Buy).