Is Rio Tinto plc A High-Risk Trade Following Its Joint-Venture With Savannah Resources Plc?

Rio Tinto (LON:RIO) teams up with Savannah Resources Plc (LON:SAV) but remains a high-risk investment, argues this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rio Tinto (LSE: RIO) has not appeared on my personal wish list for a very long time but it could be worth considering its shares right now, analysts argue.

Are they right?

Strategy

The iron ore producer is teaming up with Savannah Resources (+80% in early trade) in Mozambique, it emerged today.

Unsurprisingly, Rio’s stock was flat following the announcement.

The deal is not a game-changer for Rio, of course, but there remains a doubt that its shares may deserve the attention of value investors right now — at least its depressed valuation may suggest so. 

Rio Tinto’s iron ore strategy has backfired so far — the same holds true for BHP Billiton — but management is only partly to blame for a very poor performance in recent times. After all, even Glencore, whose management has often accused both rivals of little understanding of certain basic market dynamics concerning supply and demand, has struggled over the last 12 months. 

Landscape 

At Rio and its rivals, operational hurdles have come at a time when downwards pressure on most commodities has emerged as the inevitable price to pay for a global slowdown and a shaky recovery whose prospects are highly uncertain, given that nobody can firmly assess whether the growth rate of Chinese GDP is sustainable at 7% a year. 

Signs of stress are apparent, and combine with lofty valuations in other cyclical sectors. 

As expected, the CRB Commodity Index — a commodity futures price index that is useful to determine at which point in the commodity cycle we stand — still trades at multi-year lows.  

A tough trading environment means that Rio’s strategy may take many years to pay off, or it could just be plainly wrong.

Valuation 

Like disposals, targeted joint ventures could be the way forward… although one of the most appealing features of Rio could be a takeover by Glencore, which was rejected in October. A tie-up would make a lot of sense right now — but that’s not enough to buy Rio stock, I’d argue. 

In research published earlier this month, analysts at commodity house Royal Bank Of Canada (RBC) argued that applying “a 1.0x (8%) P/NAV multiple and a 13.0x multiple to our 2016E EPS forecast, we arrive at our price target of £27/share“.

RBC’s estimates are broadly in line with the average price target from brokers, according to Thomson Reuters. Rio’s shares currently trade at 2,700p, which is not far off their five-year lows (and is some 40% below their post-crisis highs). 

Consensus estimates have fallen by 26% over the last 12 months: I doubt they have bottomed out. 

It is important to note that the NAV and EPS multiples could improve when commodity markets improve and Rio Tinto can progress further in advancing its growth projects and enhancing the returns in underperforming assets. In our view, management success here should lead to multiple expansion relative to its peer group,” RBC analysts opined. 

So, Rio Tinto remains a ‘cyclical macro play’… but one whose declining net debts, reduced capital requirements and cash flow position may be a threat to its dividend yield, which is north of 5% on a forward basis. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

If I’d invested £5,000 in a Nasdaq index fund 5 years ago, here’s how much I’d have now

The Nasdaq index keeps hitting new all-time records in 2024, as US tech stocks fly. How much could I have…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

£500 to invest a month? Consider aiming to turn that into a £20,000 passive income like this!

With a regular monthly investment, it's possible to build a large and steady passive income for retirement. Royston Wild explains.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Investing Articles

As retirement needs soar 60%, here’s how I’m building wealth with UK shares

A regular investment in UK shares and funds could help Brits create a large and lasting pension. Our writer Royston…

Read more »

Investing Articles

I’d buy Games Workshop shares before they reach the FTSE 100!

Games Workshop shares look likely to join the FTSE 100 soon. Here’s why I think investors should consider buying the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Could me buying this stock with a $2.5bn market-cap be like investing in Tesla in 2010?

Archer Aviation (NASDAQ:ACHR) stock's nearly doubled so far in November. Could this start-up be another Tesla in the making?

Read more »

Investing Articles

5,000 shares of this UK dividend stock could net me £1,700 a month in passive income

Our writer calculates the passive income he could earn from holding a significant number of shares in this powerful dividend-paying…

Read more »

Investing Articles

9.3%+ yields! 3 FTSE 100 dividend giants to consider buying

Our writer examines a trio of high-yield FTSE 100 shares and explains some of the opportunities and risks he sees…

Read more »

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »