We are upholding our Neutral recommendation on Rio Tinto plc ( RIO ).

The global markets have undergone a significant structural change over the past five years, reflecting the massive, material- intensive growth cycle in China, India and other emerging economies. The world has been witnessing rapid industrialization and urbanization among the developing nations; which over time, has reinvigorated massive commodity demand such as iron ore, copper, and aluminum. This furthers Rio Tinto's financial prospects.

The company's key growth strategy over time has been its continued run of acquisitions and investment, including its increased interest in Ivanhoe Mines Ltd, acquisition of BHP's stake of Richards Bay Minerals as well as investment in iron ore mines of Western Australia. Thus, we believe Rio Tinto's long life, low-cost assets, alongside a strong pipeline of attractive growth projects, are expected to generate positive cash flow under all market conditions. In addition, the company continues to strategize divestitures alongside new growth projects in order to reduce operational expenses while generating additional cash flow.

However, the cutthroat metals and minerals market cannot be overlooked. The market is highly competitive, especially in Europe and Asia, and in particular, in the emerging nations like China and India, Japan, and other international markets. The principal factors affecting mineral market competition are price, quality, range of products, reliability, and transportation costs. Such a competitive environment may dampen the company's growth.

Execution risk due to governmental delays on mining permit issues, declining iron ore grades and natural disasters like tropical cyclones, severe monsoon, and flooding have been disrupting mining operations. This has been raising the company's operating costs. In addition, a global rise in raw material costs and energy prices continue to add to the woes. Also, significant volatility in currency prices, mining cost inflation along with increased resource competition have continued to impact the company's top-line growth.

Demand for iron ore products is usually tied to worldwide demand for steel, which is largely influenced by global economic activity. The present instability and lower-than-expected world growth rate raise our concern on the mining stocks. Moreover, risk of re-occurrence of a global economic downturn may negatively impact the share price as Rio happens to be a cyclical stock.

However, Rio remains committed toward returning value to its shareholders, which is evident from a 34% increase in full year dividend to $1.45 per share. We believe operational efficiency, superior growth options and a positive long-term outlook have led Rio to boost its annual dividend. Management remains positive on 2012 earnings, anticipating strong metals and minerals demand from the emerging markets.

Of late, Rio Tinto reported net earnings (attributable to ADR holders) for full-year 2011 of $5,826 million, down 59.1% year over year from $14,238 million reported in full-year 2010. The decline was primarily due to impairment charges related to the Group's aluminum businesses. The consolidated sales, however, moved up 9.7% y/y to $60,537 million, driven by a worldwide advance in prices of metals and minerals as well as improvement in the company's operational efficiencies.

Headquartered in London, UK, Rio Tinto plc is engaged in exploring, mining, and processing the earth's mineral resources, producing a broad range of metals and minerals. Rio Tinto competes against global mining giants like BHP Billiton Ltd ( BHP ) and Vale S.A ( VALE ).

Rio Tinto has a Zacks #5 Rank, reflecting a short-term Strong Sell rating (1-3 months).