Why I Hate Rio Tinto Plc

There is a thin line between love and hate. But today I’m in a critical mood, so here are five reasons why I hate Rio Tinto (LSE: RIO) (NYSE: RIO.US).

A China crisis looms

When China was booming, commodity stocks followed, as the big miners competed to quench its thirst for metals and minerals. Some analysts even hailed the start of a commodity super-cycle. But the export-led double digit GDP growth Chinese spectacular has only been kept alive by a terrifying credit bubble. Even if the show does go on, China has to rebalance its economy towards a more consumption-led model at some point. That will hit demand for commodities.

Production isn’t everything

Rio Tinto is an impressive operation. Recent production results have been strong, particularly for its all-important iron ore operations. But production isn’t everything. Consumption also counts. If falling Chinese consumption meets rising commodity production, prices will fall. Given long mining industry lead-in times, this will be difficult to reverse. Commodity stocks have always been highly cyclical, and I don’t see that changing.

You’re at the mercy of the iron ore price

When the iron ore price plunged 24% in 2012, Rio Tinto duly posted a full-year loss. It didn’t help that copper fell 10% and aluminium fell 16%. Iron ore prices have rebounded, rising 20% to $137 in the last two months as Chinese steel producers topped up their inventories, adding 8% to Rio Tinto’s share price. Putting your money at the mercy of just one or two commodities looks like quite a gamble to me. Rival BHP Billiton is more diversified. Now could be a time to and take advantage of the iron ore price surge to sell up, before that over-supply hits.

You’re also at the mercy of the Chinese Communist Party

Investors still view miners as strong growth stocks, but recent performance has been poor. Rio Tinto is down over 30% over the last three years, against 20% growth across the FTSE 100. You might see that as a buying opportunity, but I see it as a warning sign of further falls to come. China looks set to founder in the middle-income trap, as it runs out of cheap labour, exhausts its environment, alienates trading partners with its huge surpluses, and hits the mother of all demographic crises. I suspect the CCP lacks the flexibility to solve these problems.

It’s a thin line between love and hate

There are reasons to love Rio Tinto. Chief executive Sam Walsh has been cutting costs, spending more carefully, and rewarding investors with a progressive dividend policy, including a recent 15% increase to 83.5 cents per share, elevating the yield to 3.3%. A -38% drop in earnings per share in 2012 and -1% this year is forecast to reverse in 2014, with 14% growth. You can also buy it at 10.2 times earnings. These are all highly likeable numbers. But I still feel there is more pain to come first.

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> Harvey owns shares in BHP Billiton. He doesn't own any other share mentioned in this article