Argus Initiates Rio Tinto With Buy Rating, $36 Target

Argus’ John Eade initiated coverage of Rio Tinto plc (ADR) RIO with a Buy rating and price target of $36.

Commodity Price Weakness

“Although we expect commodity price weakness to weigh on Rio Tinto’s results in the near term, we look for improved industry fundamentals and stronger sales and earnings in 2017,” Eade mentioned.

Eade pointed out that the company had been facing challenging business conditions over the past few years, driven by the sharp decline in commodity prices.

However, the analyst also noted that Rio Tinto responded to the commodity price downturn by strengthening its operating performance and balance sheet through initiatives such as “cost-savings programs, asset sales, and reductions in capital spending.”

The company has also announced a dividend cur, which Eade believes would “provide greater financial flexibility.”

Eade views the current stock valuation as attractive, given the expectations of a turnaround in Rio Tinto’s business through 2017.

2015 Earnings

The company reported its 2015 results on February 11, with adjusted earnings declining 50 percent from the 2014 levels. Sales also declined 27 percent from the 2014 levels, due to lower commodity prices.

Cost Cuts

“Cost reductions (including lower energy costs), volume increases, and favorable currency effects partly offset the impact of weaker pricing,” according to the Argus report.

Due to the weak industry conditions, Rio Tinto intends to reduce operating costs by $1 billion during both 2016 and 2017. The has already achieved cost reduction of more than $6 billion since the beginning of 2013.