The Rising Influence of Rising Affluence

[DewDiligence]

Not Yet All Grand at Rio Tinto

[It’s hard to make a case for buying RTP when you can buy BHP (or BBL, which is the same company as BHP and trades at a discount) instead.]

http://online.wsj.com/article/SB125078272918046607.html

›AUGUST 20, 2009, 3:29 P.M. ET
By MATTHEW CURTIN

Rio Tinto's share price has nearly doubled this year. But since the miner announced a life-saving $15 billion rights issue in early June as well as an iron ore joint venture with BHP Billiton, its stock price has lagged the sector.

That underperformance continued Thursday despite relatively robust interim results. Investors were only moderately impressed with Rio beating its cost-cutting targets and a promise to reinstate the dividend in the second half if all goes well. Rio is also picking up the pace on capital spending, aiming for $5 billion this year compared with an original forecast $4 billion.

Rio is well geared to any cyclical upswing, assuming it continues to sell assets, reduce debt and cuts costs faster than expected. While Aluminum unit Rio Tinto Alcan posted a first-half loss, it has reduced its cash break-even point to $1,350 a ton compared with current prices of around $1,900.

Forecasts in volatile commodity markets are dangerous, but Rio's net debt may fall by half this year to around $20 billion, and halve again next year, by which time earnings before interest, depreciation and amortization might have rebounded to nearly $15 billion from $12 billion forecast for this year. That could leave Rio's 2010 EV/Ebitda multiple at less than seven times, while its peers trade on nearer eight times.

Why? The diplomatic fracas between Australia and China, with the arrest of some Rio staff in China on charges of stealing commercial secrets, is a concern. But the business impact seems negligible so far. Rio says it is running its iron ore and coal operations at full capacity to meet Chinese demand.

More worrying short term is Rio's acknowledgement it is selling much of its iron ore at the moment at a discount to buoyant spot market prices. BHP is increasingly selling at market-related prices. And a significant chunk of Rio's aluminum output remains marginally profitable even at current prices. Much rides on the success of second-half cost-cutting. And the fact Rio can afford only half what BHP can for capital projects underlines the lingering impact of its recent financial recklessness.‹