Analysts Downgrade Rio Tinto

While commodity costs are falling, Morningstar analysts have re-evaluated the likely decline and believe they were being overly optimistic - resulting in a reduction in the fair value

Mark Taylor 22 April, 2015 | 9:32AM
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It was a soft first quarter from Rio Tinto (RIO), but an 8% reduction in our fair value estimate reflects an increase in assumed operating costs across all segments and a reduced copper production outlook. While costs are falling, we have re-evaluated the likely decline and believe we were being overly optimistic. We have tempered the degree to which we expect labour cost pressures to abate in sympathy with weaker commodity prices generally.

We've reined in our forecast copper volumes to tally with guidance for 500,000 to 535,000 tonnes mined, sharply lower than 2014's 615,000 tonnes mined. Lower grades at Kennecott reflecting a focus on de-watering is a key detractor.

Rio Tinto continues its efficiency drive, but cost cuts do not improve the relative competitive position as the whole industry curve is moving down, hence we maintain our narrow moat rating. It's founded on low-cost supply thanks to high-quality geological deposits and economies of scale. Fair value uncertainty remains high in recognition of outsized exposure to iron ore.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rio Tinto PLC4,578.50 GBP0.00Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.