On January 22, we downgraded metal mining giant,
Rio Tinto Plc.
) to Underperform based on the company's huge write down of
assets relating to its coal and aluminium business.
Why the Downgrade?
On January 17, the company announced a possible impairment of
assets to be charged in fiscal 2012. The write down includes
roughly $3 billion for assets relating to the Rio Tinto Coal
Mozambique, whereas an exorbitant amount of $10-$11 billion
relates to the aluminium business of the company. Along with
this, Rio also expects additional smaller write-downs in the
It is anticipated that the current write down of assets will
have a negative impact on the full year 2012 results as well. The
company expects to announce results for the full year on February
14, 2013. The Zacks Consensus Estimate stands at $2.86.
With a Zacks Rank #3 (Hold) and Zacks Earnings Expected
Surprise Prediction (ESP) (Read:
Zacks Earnings ESP: A Better Method
) of -10.84%, Rio is less likely to beat earnings next quarter.
Moreover, this stock has mostly seen downward estimate revisions
in the recent past. Estimates for year 2012 declined 0.2% to
$5.59 per share over the past 90 days, while that for fiscal 2013
declined by a much higher percentage of 5.9% to $6.10, over a
period of 90 days.
Rio also posted weak results for the half year 2012 with sales
of $25.3 billion, down 12.8% year over year. Also, the earnings
per share dropped 22% year over year to $3.16 per share, for the
half year 2012.
Cause for Concern
The company operates in a highly competitive industry, which
is impacted by micro factors such as price, quality and costs
along with macro factors such as government delays on permit
issues and tax policies. Also, in a scenario, where volatility in
terms of demand and prices persists, it is difficult for the
company to sustain and grow its margins and earnings.
Other Stocks to Consider
While we remain bearish on Rio, other companies that are worth
Impala Platinum Holdings Ltd.
BHP Billiton Plc.
Denison Mines Corp.
); each holding a Zacks Rank #2 (Buy).
BILLITON ADR (BBL): Free Stock Analysis
DENISON MINES (DNN): Free Stock Analysis
(IMPUY): ETF Research Reports
RIO TINTO-ADR (RIO): Free Stock Analysis
To read this article on Zacks.com click here.