Why growth stock Rio Tinto plc could help you retire earlier

It is has been another great year for the major mining stocks, with Rio Tinto(LSE: RIO) up 22% and Glencore flying 29% (LSE: GLEN). Over two years, performance is spectacular, with the stocks soaring 120% and 421% respectively. Anybody who bought at the darkest point of the commodity sell-off has plenty to celebrate today.

China crisis

Where China goes, mining stocks tend to follow. The worst of the sell-off came in January 2016, when many thought China would finally crack. Then emerging markets came roaring back into form in 2016 and in particular 2017, when they were the year's best performing asset class. Emerging market equities rose 37%, according to MSCI, with China up a whopping 50%.

Emerging markets were helped by the weaker dollar, because their commodity exports are priced in dollars, and this made them cheaper to their foreign customers.

Bouncing back

Rio Tinto and Glencore are now reaping the benefit from their brutal cost-cutting, as their slimmed down operations are cashing in. I have previously questioned their strategy of maintaining high production levels in the face of falling prices but this appears to have been justified, as they have driven out smaller, higher-cost competitors, and kept a firm grip on market share.

Today Rio Tinto published its Q4 production results, with chief executive J-S Jacques reporting: "The business performed well in the fourth quarter, and we finished the year in line with guidance across all major products." It shipped a record 90m tonnes of iron ore from its Pilbara assets over the quarter, while last year it announced more than $8bn of cash returns to shareholders.

Value stock

Jacques also hailed Rio's focus on value over volume and disciplined allocation of cash, which should ensure superior shareholder returns. Despite its strong growth performance, it still trades at a modest 13.3 times forecast earnings, with a price-to-earnings growth (PEG) ratio of -1.1. So you are not overpaying if you dig in today. Plus you also get a forecast yield of 4.5%, with cover of 1.7. Here's another great FTSE 100 dividend bargain.

Glencore continues to roar back to form, with forecast earnings per share (EPS) growth of a whopping 1,216% this year, which will haul its P/E back to earth, from today's 188.5 times earnings to a more sensible 14 times. The dividend is also being repaired, with a forecast yield of 3.4% and cover of 2.2. However, at 3.5%, operating margins are a fraction of Rio Tinto's juicy 26.8%.

Earthly powers

Glencore fared far worse than Rio Tinto in the sell-off, which is largely why it roared back to form at a faster pace as management was forced to seize the business by the scruff of its neck, or watch it die.

Both companies look far stronger today, but as ever remain dependent on the world economy. Despite current nervousness over share valuations, global GDP is ready for lift-off. One note of caution though, City analysts predict EPS at Rio Tinto will fall 12% in 2018 and another 7% in 2019, while a 10% rise for Glencore in 2018 will be followed by a 2% drop in 2019. Commodity stocks will remain bumpy, but 'twas ever thus. A sensibly balanced retirement portfolio cannot afford to ignore them.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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