London Stock Exchange-listed mining company Rio Tinto [RIO], one of the largest companies on the FTSE 100, is showing signs of strength despite industry fears.
Most pertinently, the IMF expects commodity metal prices to decline both this year and next. Yet Rio Tinto appears to be appealing to analysts, despite shares being down around 11% from the year-long high of 4,500p in June – like most stocks, it wasn’t immune to the stock market sell-off experienced last summer.
The Anglo-Australian company’s basic earnings per share grew by 37% in the first half of 2018, with ordinary dividends per share up 15% compared to the same period in 2017. Rio stock is trading at a forward P/E of just 9.6.
And despite the IMF’s pessimistic outlook for the pricing of commodity metals, Rio’s share price grew more than 7% between January 4 and 9 after losing ground in the year’s opening two days of trading. It is worth noting that similar surges of around 10% in September and November 2018 were followed by a decline.
Metal price on the decline
Generally, the commodity metals sector is not in a good way; the IMF expects a decline in its commodity metals price index in 2019 and 2020.
Moody’s also reflected this dour judgment of the sector, with John Lonski, head of capital markets research at Moody’s Analytics, saying the metals dip could even be a positive for American bondholders as the Treasuries market has historically followed metals prices. Moody’s index for base metal prices fell 12.2% in the past month, its lowest since last August.
Rio’s stock could also be hit by another interest rate rise in the US. If the Fed goes ahead with its three planned rate hikes in 2019, a stronger dollar would limit demand for commodity metals.
Money either way
Since Rio Tinto introduced a new dividend payout policy, investors have received a yield on average of 6%, making the stock an attractive buy for income investors.
Looking ahead, analysts still believe the future of Rio’s stock is bullish, with most predicting a $58.84 price target on a 12-month basis, which would lead to an 18.41% stock-rise and a $95.32bn surge in market cap. The company’s current market cap stands at $81.533bn.
Rio Tinto's predicted stock rise based on a $58.84 price target on a 12-month basis
According to Reuters, of six analysts tracking Rio Tinto, one rated the stock as a hold while the remaining five rated it a buy or strong buy.
|PE Ratio (TTM)||6.95|
|EPS Ratio (TTM)||555.30|
Rio Tinto stock vitals, Yahoo finance, as at 14 January 2019
Chinese volatility looms
The cyclical nature of mining stocks makes it difficult to stake too much faith in any one company, even though Rio Tinto has a competitive portfolio of mines and manageable debt load, and enough free cash to repurchase shares in the billions, along with the aforementioned 6% dividend.
And so, while the company appears to be among the best placed of its peers to rise in price and reward investors, there remains a wider question mark over the global economy’s future growth, and China’s capacity to buttress the sector. Chinese volatility is expected due to the country’s environmental policies, tariff negotiations with the US, and Chinese policy responses aimed at stimulating the economy and cushioning the impact of the ongoing US trade talks.