Hot stock: Rio Tinto

What’s new Rio Tinto recently unveiled another solid quarterly production update, with its flagship iron ore business producing a record 199 million tonnes in 2012. Production records were also set in bauxite and alumina. Thermal coal production was up 5 per cent (albeit off a low base), while the copper division was disappointing, recording its third straight year of production decline.

But Rio Tinto’s strong production numbers were overshadowed by the abrupt departure of it chief executive, Tom Albanese, and fresh write-downs worth $US14 billion ($13.3 billion).

These write-downs related mostly to Rio’s aluminium business, where production fell about 10 per cent in 2012.

The aluminium business has been a thorn in Rio’s side since its $US38 billion purchase of Canadian aluminium producer Alcan in 2007 – a purchase that was fuelled by debt and has been largely written off.

But we view the elevation of the iron ore division chief, Sam Walsh, to the chief executive role favourably.

During his stewardship since 2004, Rio Tinto’s iron ore production has exploded from 104 million tonnes to 199 million tonnes in 2012, with impeccable capital planning and execution. China’s insatiable demand for the commodity has, of course, helped in driving the growth.

Outlook The iron ore division is the growth engine of Rio Tinto, accounting for about three-quarters of group earnings. Encouragingly, the outlook for this business is positive.

We are confident the stimulatory monetary and fiscal actions by Chinese authorities will continue to ensure solid economic growth in the country, underpinning demand for iron ore.

Equally important is Rio Tinto’s capacity to meet this demand. The company is on track to deliver 360 million tonnes of iron ore in 2015 from the Pilbara, which is a phenomenal expansion from the already impressive 199 million tonnes dug up in 2012.

While the underperforming aluminium division continues to cast a pall over the company, we believe a sale of the business might occur under Walsh.

Price While Rio Tinto’s stock price has been flat during the past year, it has risen about 30 per cent in the past six months as concerns ease over China’s economy and risk appetite returns to the market.

Worth buying? The outlook for Rio Tinto’s key iron ore business is positive, with a strong production outlook and a solid longer-term

macro-economic picture helping underpin demand. The company boasts a strong balance sheet, even with the non-cash write-down of its aluminium assets.

Trading about 12 times consensus forward estimates, we remain positive on Rio Tinto and believe its shares at present levels are worth buying.

Greg Smith is head of research at Fat Prophets sharemarket research.

The original release of this article first appeared on the website of Hangzhou Night Net.

Related Posts

Comments are closed.