Rio Tinto feeling the commodities rout

Rio Tinto will announce its third-quarter trading statement on 16 October, and the mining giant is finding it difficult as metal prices are under pressure. 

Rio Tinto mining
Source: Bloomberg

The Anglo-Australian miner registered a 43% drop in first-half profits in August, and the fall in earnings would have been larger was it not for cost-cutting.

Rio Tinto is doing its best to curtail spending, but the rate at which commodity markets are falling is proving too fast for the firm to keep up with. The economic slowdown in China is crushing the price of metals, and Rio Tinto is being forced to postpone projects and close uneconomical mines.

As Alastair McCaig stated, the company faces tough times ahead. The Chinese currency devaluation hasn’t fully trickled down into the commodities markets yet, and along with this there could easily be more easing in the pipeline from Beijing, making the outlook for the miner look negative.

Rio Tinto thrives on high mineral prices, but it has little control over the price of the metal and energy markets, and now it can only react to falling commodity prices. The annual cost-cutting target has been upped to $1 billion from $750 million, and the capital expenditure budget has been cut to $5.5 billion from $7 billion.

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Rio Tinto will release its full-year numbers in February 2016, and the market is expecting revenue of £36.33 billion and adjusted net income of £4.81 billion. These forecasts represent a 24% drop in revenue and a 48% fall in adjusted net income. The miner will also reveal its first-half results on the same date, and dealers are anticipating revenue of £17.24 billion and adjusted net income of £1.94 billion, which compares with the first-half revenue and adjusted net income of £17.98 billion and £2.92 billion respectively.

Analysts are bullish on Rio Tinto and out of 33 ratings, 15 are buys, 13 are holds, and five are sells. The average target price is £26.98, which is 6.89% above the current price. Investment banks are also bullish on BHP Billiton, and out of the 33 recommendations, 13 are buys, 17 are holds, and three are sells. The average target price is £12.32, which is 5.5% above the current price.

The share price of Rio Tinto has been sliding since 2011 and there is no indication of that trend changing, with £21 the target. Any moves higher in the stock will encounter resistance at £26.45 and £28 respectively. 

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