On Sep 12, 2013, we reiterated our Underperform recommendation on Rio Tinto plc (RIO), based on weak results for the first half of 2013.
Why the Retention?
Rio Tinto reported weak results for the first half of 2013, with underlying earnings declining 18% year over year to $4.2 billion. Consolidated sales in the first half of 2013 moved down to $24.5 billion from $25.3 billion recorded a year ago.
Rio Tinto recorded lower average selling prices for many of its commodities leading to a decline in total revenue and margins. On an average, iron ore was sold at a price of $137 per tonne, declining $5 per tonne year over year. Moreover, coking coal prices declined substantially due to increased supply from major seaborne producers and weakness in the import demand. Additionally, total aluminium volume as well as prices were impacted by a slowdown in Western China. Reduced prices led to a $1.3 billion year-over-year drop in underlying earnings.
The wall slide at the Kennecott Utah Copper’s Bingham Canyon Mine, in April this year, is expected to reduce Rio Tinto’s copper production in the coming quarters. In view of the disaster, Rio reduced the mine’s expected mined copper production by 125,000 tonnes to 540,000 tonnes in 2013. Likewise, the expected production for refined copper has also been reduced by 100,000 tonnes to 205,000 tonnes in 2013. Moreover, Rio Tinto incurred an additional cost of $0.3 billion in the first half of 2013, related to the write-off of waste stripping costs and damaged equipment, following the wall slide.
Moreover, Rio Tinto faces execution risks due to resource nationalism, governmental delays on mining permit issues and tax policies. Natural disasters like tropical cyclones, severe monsoon and constant flooding raise concern.
The Zacks Consensus Estimate for 2013 has dropped 7.8% in the last 60 days to $4.72 per share, reflecting an estimated year-over-year decline of 6.1%. For 2014, the Zacks Consensus Estimate declined 10.8% in the past 60 days to $4.81 per share, reflecting year-over-year growth of 1.9%.
Other Stocks to Consider
Rio Tinto currently carries a Zacks Rank #3 (Hold). Other stocks worth a watch in the industry include Denison Mines Corp. (DNN), US Energy Corp. (USEG) and Gold Fields Ltd. (GFI). All these stocks carry a Zacks Rank #2 (Buy).