Rio Tinto Ltd reported its first half results after the market close on Wednesday Aug 1. Management must be wondering what they need to do. Despite a 12% lift in underlying profit, the highest ever interim dividend and another US $1 billion share buy back the shares were trounced in London trading immediately after the announcement.

One issue is that analysts forecast an even better profit on the back of higher aluminium and copper prices. The US $1.17 dividend reflects a 50% pay-out ratio, so by implication the 15% lift in dividend may also have disappointed. There were minor operational issues that affected some production, and some tricky negotiations with the Mongolian government over a power plant. The CFO also expressed concerns about the impact of a trade war on commodity prices. If these factors drove the market reaction in my view traders are missing the big picture.

Copper production is up 42%. Iron ore production rose 9%. The increased buy back and dividend reflect one of the biggest problems facing management – what to do with all the cash?

If Australian investors take the same approach as their British counterparts it may represent an opportunity. Price to earnings ratios are less commonly used in evaluating resource stocks due to their highly cyclical nature. Investors tend to “look through” the commodity cycle, pumping up the PE at the start of a cycle, and compressing it towards the end. Rio is trading on around 12x times next year’s earnings, and around 10.5x this year’s. At these levels, it suggests the commodity cycle is coming to an end.

However, the fact remains global growth is on an upswing, normally supportive of key industrial metals. Many commodity strategists maintain very conservative estimates of long run prices, in some cases well below current spot prices. These are the reasons any pull back in Rio’s share price could represent good value buying.

The weekly chart shows Rio could pull back to around $76 and remain in an uptrend. If it does, I’ll be waiting.