MINING MARKETS & INVESTMENT NEWS — Investment Commentary — Rio Tinto shareholders told it’s time to take profits

European investment houses T. Hoare Canaccord and Paribas have both rated shares of Rio Tinto (RTP-N) a “sell,” following the company’s release of mid-year production and earnings figures.

London-based analysts Mark Horn of Hoare Canaccord and Charles Kernot of Paribas based their sell rating on the relative overvaluation of Rio Tinto, compared both to other primary metals companies and to Rio’s own projected earnings. Both analysts regard Rio as fundamentally sound, with good earnings prospects, but simply priced too high.

Paribas’s Kernot, who rated Rio as a sell last March when the company was trading around 8.15, currently sees a target price of 10. The company’s shares were trading on London at 10.73 (US$17.25) at presstime.

Horn emphasizes the company’s copper division, which includes U.S. copper producer Kennecott and its Rio’s holding in Freeport-McMoRan Copper & Gold (FCX-N). He fingers the relatively high break-even costs at Kennecott (US64 cents per lb., or US$1,400 per tonne) as a problem area for the division. Kernot notes big improvements at Kennecott’s mammoth Bingham Canyon operation, where cash costs have been pared to US36 cents (US$790 per tonne).

Rio’s industrial minerals divison, including borate and silica producer U.S. Borax, Quebec-based titanium producer QIT, and the Argyle diamond operation, is stable, and, says Horn, is “the mainstay of the company’s defensive reputation” among investors. He also suggests that Australian aluminum producer Comalco (in which Rio owns 72%) could be a major moneymaker over the next two years as markets revive and Comalco benefits from a recent (and costly) restructuring.

But while things are looking up for Rio Tinto’s operations and revenue, the price currently placed on it by the market is significantly above a fair value. Earnings were UK23p (US37 cents) in the first half of 1999. Paribas predicts 1999 earnings of UK45p (US72 cents) and Hoare, UK49p (US79 cents).

These earnings figures imply a current price-to-earnings ratio of 22-to-24, well above its 1992-1998 average of 16. “Although positive sentiment is supporting momentum, it is our view that Rio Tinto’s stock is trading at a level substantially above its quantifiable fundamental value and beyond its historic reference ratio value ranges,” says Horn. He backs this up by a valuation of Rio’s assets that places the fair price of the shares between 5.27 and 6.34 (US$8.47 to US$10.20).

Kernot does not share the market’s apparent hopes for Rio Tinto’s earnings, suggesting that the copper, iron ore and coal markets are still too depressed to provide Rio with a large top line.

In summary, Rio Tinto may have been seen by many investors as a safe haven in a troubled resource industry, leaving companies that took a greater battering over the past two years as much better values.