Rio Tinto crashes to six year lows

Investment analysts cut profit forecasts, stock price targets, for debt-ridden mining major; some advise switching to erstwhile Rio Tinto predator, BHP Billiton.

Rio Tinto's stock price has fallen by as much as 40% this week, as investors flee from the latest scare story in global resources. Increasing numbers of investment analysts are cutting recommendations on Rio Tinto's stock, and warning that the debt-ridden mining house could be forced into a capital raising.

The latest trigger for the sell off in Rio Tinto was the news out on November 25 that BHP Billiton, the world's biggest diversified resources stock, had abandoned its bid for Rio Tinto. Rio Tinto's stock price is now down by 85% from its record highs, seen in May this year, and on Thursday moved to levels not seen in six years.

According to a recent report from credit rating agency Standard & Poor's, Rio Tinto's adjusted net debt on June 30 2008 was about $50bn, more than twice Rio Tinto's current market capitalisation, or value. BHP Billiton, by contrast, has net debt of less than $10bn, and a market value of $94bn. A good portion of Rio Tinto's debt woes can be traced to its all-cash acquisition last year of Canada's Alcan, substantially expanding Rio Tinto's aluminium interests. Dollar aluminium prices moved to four year lows on Thursday, as the general slide in commodity prices continued.

A market report summary published by a newswire service says, analysts at Credit Suisse said Rio Tinto could sell shares; Citigroup this week cut its Rio Tinto target price; JPMorgan Chase reduced its target price by more than half, and ABN Amro cut its earnings estimate by 36% and recommended investors switch to BHP Billiton.

According to Credit Suisse analysts, Rio Tinto could sell shares on a 1-for-3 basis to raise about $7,5bn, paying down debt and alleviating investor concern about its balance sheet. A spokesperson for Rio Tinto indicated, however, that the group has no intention of announcing a rights issue.

Rio Tinto's market value has declined from a peak in May of $169bn to just $23bn, thus falling behind the current market values for each of both rival Anglo American, and Barrick, the world's biggest gold miner. The extent of Rio Tinto's stock price contraction, at 85%, ranks it alongside similar compressions seen for Mosaic (potash), Norilsk (nickel, platinum, and other), Xstrata (diversified), Chalco (aluminium) and Freeport-McMoRan (copper and gold) among the world's top 20 mining names.

Rio Tinto's major products include aluminium, copper, diamonds, energy products (coal and uranium), gold, industrial minerals (borates, titanium dioxide, salt and talc), and iron ore.
 

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