We are maintaining a Neutral recommendation on Rio Tinto plc (RIO) based on the company’s continued focus on exploration, innovation and sustainable development. Rio Tinto’s operational efficiency and growth prospects bode well to create value for shareholders.
Over time, Rio’s key growth strategy has been its industry-leading portfolio of growth projects and continued acquisitions. This has been supported by massive metals and mineral demand due to ongoing industrialization and urbanization among emerging markets.
The company’s continued investment in industry-leading, cost-trimming technology looks impressive and is expected to increase automation while improving its productivity in the coming years. Moreover, the company’s long-life, cost-competitive and expandable assets add value to the stock.
However, a highly competitive metals and mineral market pose serious threats; such a cutthroat environment may dampen the company’s growth prospect. Moreover, the current instability in the macro economy and a slower-than-expected global demand remain matters of concern.
The company faces execution risk due to resource nationalism, governmental delays on mining permit issues, tax policies and natural disasters. Moreover, any improvement in iron ore grade, which have been declining globally, is expected to raise production costs.
Adding to this, significant volatility in currency prices, higher energy costs and mining cost inflation may affect margins and reduce earnings as well.
Rio Tinto’s business activities are spread across the world but the company has a strong base in Australia and North America, with significant businesses in South America, Asia, Europe and southern Africa. The miner competes with global mining giants including BHP Billiton Ltd (BHP) and Vale S.A. (VALE). Rio Tinto carries a Zacks #4 Rank, which translates into a short-term (1-3 months) Sell rating.
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