Analysts downgrade Rio after results

DESPITE a strong earnings result last week, analysts have downgraded Rio Tinto on concerns for the outlook for iron ore.

Kristie Batten

Rio posted underlying earnings of $US9.3 billion ($A12 billion) and reduced debt to $12.5 billion, both better than analysts’ expectations, as well as boosting shareholder returns as promised.

But Macquarie, RBC Capital Markets and Credit Suisse all downgraded the miner from outperform to neutral (or sector perform in the case of RBC).

Macquarie analyst Hayden Bairstow wrote that with the buy-back announced, the focus was now likely to turn to the iron ore price.

“While we expect the stock to react positively to strong cash flow and earnings result, the outlook for iron ore prices remains subdued,” he said.

“The increased dividend yield and buy-back should put somewhat of a floor under the stock, however we believe a recovery in iron ore prices remains the key driver of any material upward move in the share price in the near term.”

RBC’s Chris Drew said momentum in cost savings, capital expenditure and debt reduction should start to slow now.

“We have become increasingly concerned about Chinese steel consumption trends, and view steel exports of 10 million tonnes per month as unsustainable,” he said.

“With domestic China steel production trends a higher risk in 2015 than 2014, we also think iron ore could be at further risk.”

Iron ore accounted for $8.1 billion of Rio’s underlying earnings, increasing its dominance as Rio’s main earner.

But weak iron ore prices saw iron ore earnings before interest, tax, depreciation and amortisation drop by 18% to $14.2 billion.

Iron ore cash costs for the full-year were $19.40 per tonne, with costs dropping from $20.40/t in the first half to $18.70/t in the second half.

The company said that based on an Australian to US dollar exchange rate of 78c and fuel prices of A67c per litre, cash costs for the December quarter would have been $17/t, solidifying the company’s position as the world’s lowest-cost iron ore producer.

The current iron ore spot price for 62% fines is $63.19/t.

Macquarie’s price target for Rio is $A63, RBC’s is $66 and Credit Suisse’ is $65.

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