Rio tie to iron set to drag

Its latest multi-billion dollar pay-out isn’t entirely welcome

Its latest multi-billion dollar pay-out isn’t entirely welcome

Rio's decision to pump out even more cash to shareholders, on top of a yield that already surpasses FTSE 100 rivals has not pleased investors. The group also reports an £800m write-down related to its troubled Oyu Togloi project in Mongolia. Stripping out a one-off $4bn from an asset sale included with the half-year pay-out last year, the sum totalled $3.2bn. That’s less than the $3.5bn package announced on Thursday, including a $1bn special dividend.

Dependence on the steel-making metal also causes misgivings. Soaring iron ore values buoyed the interim performance, lifting underlying H1 earnings 12% to $4.93bn, comfortably above the $4.86bn average forecast. Yet at $11.6bn of consolidated sales over the six months to 30th June, iron ore constituted over half of Rio's $20.2bn total sales. Forecasts of a price a retreat abound. The futures fair value curve points below $100/MT in a year, from around $140/MT for the front-month contract on China’s Dalian Commodity Exchange right now.

Rio spending is up, with a focus on copper, though large projects are mostly at initial stages. The group itself cites "continued cost pressures...primarily reflecting an increase in iron ore unit costs.”

Rio’s shares still over-perform FTSE 100 peers so far this year. They face similar problems, but at a lower magnitude. Rio's stock could have a heavier negative bias in the second half of 2019.

Chart thoughts

For buyers, it’s now crucial for RIO to close above its rising line since April to avoid damaging the longer trend since early 2016. The conundrum is that the cluster of failures somewhat below the years 5040p high were quite emphatic, marking out 4914p-4773p as a formidable barrier. So, any recovery at current prices will need to be solidly-founded to have a chance of progressing higher. The slump off the years high within a short channel resembles a declining flag that could certainly be a continuation pattern. So long as the trend holds. If not, sellers will be looking beyond possible support at kick back lows of 4464p and 4348. More aggressive support of 4209p and 4126p would be required if the current down leg becomes a trend

Rio Tinto CFD – daily

Source: City Index

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.