What’s Stopped Me From Buying Rio Tinto Plc Today

Royston Wild considers the investment case for Rio Tinto plc (LON: RIO).

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Today, I am looking at Rio Tinto (LSE: RIO) (NYSE: RIO.US), and assessing whether the mining play provides ripe opportunity to dig up a bargain.

Earnings continue to slip amid market weakness

Rio Tinto announced in this month’s half-yearly update that underlying earnings slipped a worrying 18% in January-June, to $4.2bn. This was due to the effect of depressed commodity prices and higher tax rates, the company said.

In better news, Rio Tinto said that it has achieved annualised cost savings of $1.5bn, representing three quarters of the firm’s planned target. The miner has initiated a massive reduction in headcount, cutting 2,200 jobs from the same point in 2012, and has significantly scaled back capital expenditure in a bid to repair the balance sheet. It now expects to spend $14bn in 2013, down 20% from last year.

Still, the company is struggling to spin off its non-core assets, and announced that it has halted the sale of its underperforming Pacific Aluminium operation as it will not attract fair value at the current time. This follows the aborted sale of its diamond division, terminated in June, while its Iron Ore Co. of Canada is also failing to attract firm bidders.

A risky pick as commodities outlook remains weak

City analysts expect Rio Tinto’s earnings per share to follow last year’s 38% earnings per share collapse with a 4% slide in 2013, to 310p. But the company is then anticipated to stage a 19% improvement in the following 12 months, to 370p.

Despite the prospect of more near term earnings woe, forecasters are expecting the mining giant to increase 2012’s full-year dividend of 167 US cents to 183 cents this year and 197 cents in 2014. These payments currently yield 3.7% and 4%, ahead of the FTSE 100 average of 3.2%.

I believe that Rio Tinto is a high-risk selection for today’s stock pickers, as fears over the state of the global economic rebound — and in particular concerns over economic cooldown in manufacturing powerhouse China — continue to whack commodities prices.

It could be argued that investor trepidation is currently factored into the share price, the company trading bang on the P/E value benchmark of 10 versus an average prospective figure of 16.1 for the FTSE 100. But as supply/demand imbalances amongst many of its key commodities continue to worsen, I believe that Rio Tinto remains in danger of a severe price drop and further earnings anxiety.

Dig for treasure with the Fool

As I have explained, Rio Tinto — like all natural resources plays — comes attached with a heightened risk profile. Drilling for oil and minerals mining is often a ‘hit and miss’ business where the timing, and indeed quantities, of potential payloads are extremely unpredictable.

To help you avoid these potential pitfalls, The Motley Fool’s exclusive “How To Unearth Great Oil & Gas Shares” report gives an expert view on how you can make a fortune from what lies under our feet. Click here now to download our report — it’s 100% free and comes with no further obligation.

> Royston does not own shares in Rio Tinto.

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.

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