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Go to Rio

In January 2016 Rio Tinto shares (RIO) traded below $40. This month they traded above $80. This doubling in share price by a blue chip stock is a remarkable performance. Naturally shareholders who’ve enjoyed this rise are wondering whether it’s time to take profit. In my view both the company’s production report and the long term chart support the idea that RIO has further to run.

This week RIO told investors it increased iron ore shipments from Australia by 9% in the first half year. Bauxite production is up 7%, and mined copper increased by 42%. Its Canadian iron ore operations have returned to normal, and guidance from RIO was pushed to the higher end of previously forecast ranges. On the less positive side aluminium production fell and the company warned on rising costs.

On balance I read this as highly likely that some analysts will revise their share price targets upwards.

The long term chart above is a stark reminder of how far the global mining group could rise in a buoyant environment. Pre-GFC RIO shares touched $150. The post-GFC high is $89.04. If analysts revise their forecasts and the shares breach this ten year high traders could pile in on this share price signal. Note the (green) up trend line. Any positive response to this week’s production report would see it respect the line and continue the trend.

Naturally there are risks. China dominates the seaborn iron ore market. Investors (still) expecting a credit crisis or some other hard landing for the economy in China may have already sold RIO. However given these fears were well expressed when RIO was trading closer to $40 it seems unlikely that those still clinging to this idea own RIO shares.

Another significant risk is that commodity analyst have underestimated iron ore prices. At the peak iron ore contributed more than 70% of RIO’s revenue. Many estimates for longer runs prices are in the $50 to $60 per tonne range. The average over the last year is closer to $70. If commodity prices estimates are revised upward as RIO kicks production higher the share price action could become explosive.

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