We reaffirmed our long-term Neutral recommendation on
Rio Tinto plc
) on May 22, 2013, as risk reward remains fairly balanced for the
stock at this juncture.
Why the reiteration?
Rio Tinto announced year-over-year improved production details
on Apr 16, in which production increased across most of its
business segments including aluminium, bauxite, thermal coal,
mined coal, iron ore, uranium and salt. However, products like
alumina, diamonds and gold experienced a year-over-year
Subsequent to the release, Rio Tinto opened up the Argyle
underground diamond mine, which is expected to produce around 20
million carats of diamonds annually.
Rio Tinto is making earnest efforts to reduce costs and taking
strategic steps like shutting down its operations in areas where
either the costs are high or the environment is not suitable for
operations. In the process, it expects cost reductions to the
extent of $3.0 billion per year, by 2014 end.
Moreover, Rio Tinto expects to reduce its capital expenditure
for 2013 by almost 25.5% to $13.0 billion. This will increase the
free cash flow of the company with the possibility of more return
to the shareholders. The company is likely to cut down on costs
through the maintenance capital expenditure.
In spite of making these concerted efforts in cost
curtailment, the fact remains that the write down of assets in
2012 worth $14.4 billion leaves the company in a bad shape. The
write-down included roughly $3.4 billion for Rio Tinto Coal
Mozambique (RTCM), with an additional $11.0 billion for the
company's aluminium assets.
Also, the recent wall slide at the Kennecott Utah Copper's
Bingham Canyon Mine has turned out to be a major hindrance to
Rio's future production expectations. In view of the disaster,
Rio has reduced the mine's estimated mined copper production by
125,000 tonnes to 540,000 tonnes for 2013. Likewise, the expected
production for refined copper is also reduced by 100,000 tonnes
to 205,000 tonnes in 2013.
Other Stocks to Consider
Rio Tinto currently carries a Zacks Rank #4 (Sell). Other
stocks to watch out for in the mining industry are
Anglo American Platinum Limited
General Moly, Inc.
Hi-Crush Partners LP
); each carrying a Zacks Rank #2 (Buy).
ANGLO AMER PLAT (AGPPY): Get Free Report
GENERAL MOLY IN (GMO): Free Stock Analysis
HI-CRUSH PTNRS (HCLP): Free Stock Analysis
RIO TINTO-ADR (RIO): Free Stock Analysis
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