We purchased Rio Tinto as iron ore price forms a base

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We purchased Rio Tinto (ASX:RIO) after they reported their full year 2014 results in February. RIO hasn't been in our portfolio since the middle of calendar 2012. In their 2014 results, RIO impressed by lowering operating costs, capital expenditure and balance sheet leverage in order to face the challenges of sustained commodity price weakness from a position of strength. We believe that the iron ore price is starting to form a base and that there is more upside than downside on a three year view. (see chart below). At the current price of iron ore, RIO should be able generate healthy cash flows to maintain dividends (US$4bn), fund the guided capital expenditure (US$7bn) and hold gearing at the low end of the target range (20-30%). From a top down perspective, having added meaningful alpha from being underweight resources, we were looking to neutralise our sector bet with a quality counter and chose RIO for its solid bottom up performance and position.

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