Analysts Upgrade Rio Tinto

Rio remains overvalued, and Morningstar stock analysts think 2016’s renaissance in prices reflects a postponing of China’s economic transition

Mathew Hodge 3 November, 2016 | 2:39PM
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Morningstar equity analysts are raising their fair value estimate for Rio Tinto (RIO) shares due to better-than-expected third-quarter 2016 production and higher near-term commodity prices. Aluminium and coal volumes were stronger than expected, as were the prices for coal, aluminium and iron ore. Commodity prices have generally remained favourable into the final quarter of 2016. Third-quarter copper output was slightly weaker than we forecast and 2016 volume guidance was lowered by about 4%.

While the timing was uncertain, Rio Tinto’s agreement to sell its 46.6% share in the Simandou iron ore deposit to Chinalco does not surprise. Rio stands to receive $1.1 to $1.3 billion in per tonne royalty payments if Simandou reaches production. The new managing director is cleaning up the company’s asset portfolio but it is also a concession that development is probably uneconomic.

Rio Tinto’s development of Simandou made no sense given the company has better options in the Pilbara. Also, production from Simandou could lower the global iron ore price and dilute returns for the existing assets. As we’ve said before, it would be better had Rio Tinto never found Simandou, particularly as the Guinean Government was keen for it to be mined.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rio Tinto PLC4,542.50 GBP0.00Rating

About Author

Mathew Hodge  is Morningstar's director of equity research, Australia & New Zealand.