Rio Tinto plc Is Now A Pure Play On China

When China rises, so does Rio Tinto plc (LON: RIO). Harvey Jones wonders what happens if China falls.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Where China goes, mining stocks like Rio Tinto (LSE: RIO) (NYSE: RIO.US) faithfully follow. When the China International Capital Corporation cut its GDP growth forecast from 7.6% to 7.3%, Rio bled. When news broke that Chinese exports had fallen 18%, Rio came tumbling after. But when the news is good, Rio smiles.

Chinese Premier Li Keqiang has just hinted that the Chinese authorities will step in to revive the country’s flagging economy. His suggestion that the government shouldn’t ignore “downward risks” and has the “ability, confidence and conditions to make sure the economy runs within a reasonable range”, instantly raised hopes of another set of stimulus measures. Rio also rose.

Don’t Blame It On Rio

This has been the story of the last decade. Mining stocks went stratospheric on the back of voracious Chinese demand for metals and minerals, then crashed back to earth as China crashed. Rio Tinto’s share price is down almost 25% over the past three years, against modest 2% growth on the FTSE 100. You can blame that on China, rather than any fundamental problem with the stock.

mine siteChief executive Sam Walsh has turned Rio round after predecessor Tom Albanese’s bungled acquisition strategy led to a painful $14.4 billion of write-downs. Rio made a $3.5 billion profit before tax last year, against a $2.34 billion loss in 2012. Walsh rewarded patient investors with a 15% hike in the dividend.

To boost the balance sheet, Rio has also been selling off businesses, paying down debt and slashing capital expenditure. These measures were well-received, but did little to spark the share price. But one set of unsatisfactory figures from China, or a few opaque words from its Premier, and it all kicks off.

China On My Mind

I’ve been surprised to see how bullish analysts remain about Rio and other miners such as BHP Billiton. Yes, the minors have been ramping up production, but they remain heavily exposed to a single, increasingly shaky, customer. Rio is especially exposed, given its relative lack of diversification, and heavy reliance on iron ore. The price is down 18% since the start of the year, largely due to the slowdown in China’s steel industry.

Rio’s dependency on China is defined in the following two figures: China accounts for around 50% of global iron ore usage, while iron ore accounts for around 90% of Rio’s earnings. Rio’s chief economist Vivek Tulpule recently forecast a steady decline in iron ore prices to just above $100 a metric ton by September 2014, largely due to excess capacity and falling demand in China. That is down from an average $126 last year.

At least Rio is prepared. Iron ore prices may continue to fall in the next few years, but exports look set to rise, keeping the miners profitable. Better still, the costly investment phase is now over, and we’re into the more rewarding production cycle. Many of my concerns are reflected in the share price, with Rio trading at 9.8 times earnings. You might find that tempting, alongside a 3.5% yield. Just keep your eye on the numbers that really matter with this stock, and they’re all coming out of China.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones doesn't own shares in any company mentioned in this article.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »