Each week we take a look at what’s in store for The Virgin Investor in the following week. This week the spotlight is on the reporting of final results from Rio Tinto. Rio Tinto is the world’s second largest iron ore exporter (after Vale) and are releasing final results on 08/02/17 following a year of iron ore price recovery. Analysts predict rising full year profits in the range of US$ 4.8bn to US$ 5.1bn, compared with a US$ 866m loss last year.

Index FTSE100
Market Cap £46.6bn
Sector Mining
Year End December
Activity Final Results
Date of Activity 08/02/17
Opportunities
  • Rising commodity prices throughout 2016 (iron ore more than doubled from $USD38 per tonne at the end of 2015 to around $USD80 per tonne by the end of 2016) are set to boost the 2016 financial results of the mining industry as a whole.
  • Having had a few years of struggling commodity prices and cost cutting regimes, the balance sheets and profit margins of the largest players in the mining industry are looking healthier. For RT the process that has included operation efficiencies, asset disposal and strategic divestments is set to continue into 2017 as the CEO again has recently reiterated a stance of value over volume.
  • Both of these points will lead shareholders to hope that the increased profitability and cash generation will feed through to rewards for loyal investors – both through an increased dividend or a share buyback.
Risks
  • Given commodity prices gradual ascent throughout 2016, it is fair to say the majority of any gain should already be priced into mining company share prices.
  • Following that, investors may feel that RT has been too slow to increase mining production to take advantage of rising commodity prices. Iron ore shipments for 2016 are up to 328m tonnes, a 3% increase on the prior year.
  • Recent demand for iron ore has largely been driven by demand from China’s steel mills. With an increasingly protectionist US less willing to do business with the world, Chinese demand may falter. This is a particular problem for RT as iron ore is their largest commodity earner.
  • Despite being one of the least indebted out of the mining companies, Rio Tinto is still expected to carry USD$11bn debt at the end of 2016 (down from USD$13.8bn the previous year). Therefore returns to shareholders may be limited by the desire to improve gearing in a volatile global political landscape.
Summary
  • Similar to the industry as a whole, RT has been helped significantly by strengthening iron ore prices. However, caution has to be exercised as questions over the speed of production increases in 2016, political uncertainty delaying projects, and less spectacular growth (or even a contraction) in Chinese construction could weigh on the stock.


The content of this article is the view of the team at The Virgin Investor and does not constitute investment advice. The value of any investment can go up and down.

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