We recently downgraded our recommendation on
Rio Tinto plc
(
RIO
) from Neutral to Underperform.
The bearish view on Rio Tinto is based on the slowdown in demand
for iron ore products across the world. Rio, being a very cyclical
stock, is largely influenced by worldwide economic activity, which
is primarily responsible for the fluctuation in demand.
The company faces execution risk due to resource nationalism,
governmental delays on mining permit issues and tax policies.
Natural disasters like tropical cyclones, severe monsoon and
constant flooding are concerns as well. The impact of higher energy
costs and raw material price fluctuations cannot remain
understated.
Moreoever, Rio faces tough competition from Brazil-based
Vale S.A.
(
VALE
) and Australia-based
BHP Billiton
Ltd
(
BHP
) as production of iron ore in Vale is cost effective and the
transportation costs are lower for BHP to Australia's geographical
proximity.
Declining iron ore grades across the world is also responsible
for enhanced production costs at Rio. Also, the competitive metals
and minerals market, volatility in currency prices and mining cost
inflation add to the woe.
Recently, Rio reported weak financial results in half-year 2012
with net earnings down 22% year over year, hurt by lower
prices.
However, hope remains, as we witness portfolio of growth
projects and continued acquisition as Rio's key growth strategy in
times ahead. Investments in iron ore mines and resource
acquisitions complement Rio's organic growth pipeline. Rio Tinto's
operational efficiency and superior growth prospects are
encouraging for the upcoming financial years as well.
Moreover, the company's continued investment in
industry-leading, cost-saving technology is expected to increase
automation and improve productivity going forward. Also, the
company'sdebt reductions tools are anticipated to withstand the
downturn in the global economy.
Rio Tinto has a Zacks #5 Rank, reflecting a short-term (1-3
months) Strong Sell rating.
BHP BILLITN LTD (BHP): Free Stock Analysis
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RIO TINTO-ADR (RIO): Free Stock Analysis Report
VALE SA (VALE): Free Stock Analysis Report
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