We reaffirmed our long-term Neutral recommendation on Rio Tinto plc (RIO) 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 decline.
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 (AGPPY), General Moly, Inc. (GMO) and Hi-Crush Partners LP (HCLP); each carrying a Zacks Rank #2 (Buy).
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