About: Rio Tinto Ltd is a globally diversified resources company that is engaged in minerals and metals exploration, development, production and processing. Rio’s main business units are Aluminium, Copper & Coal, Diamonds and Minerals, and Iron Ore. Of which Iron Ore is the largest contributor to revenue and earnings.

Why it is in the portfolio: Rio provides the portfolio with exposure to a large-cap diversified resources exposure with a reasonable level of income via a gross dividend of around 6%.

Fundamentals: Rio currently trades on a price-to-earnings ratio of around 15x forward earnings and at around 2.5x price-to-book. Rio currently offers around a 6% gross dividend yield at around a 60% dividend payout ratio. Rio has a relatively modest level of gearing of less than 20% which is below the company’s stated gearing guidance of 20%-30%. Should commodity prices remain supportive then Rio should continue to earn a reasonable return.

What could go wrong: Rio’s fate and fortunes tend to be linked to the underlying prices in the commodities in which they operate. As such, investors should be aware that price fluctuations in these underlying commodities can have an impact on the profitability of the business and hence the share price. While Rio is a globally diversified business with operations in many countries and has largely diversified away mine specific risk, investors should be aware that from time to time single mines or operations may experience singular specific risks which may impact the share price in the short-term.