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With the copper and aluminum markets much worse than earlier expected, Axiom’s Gordon L. Johnson II believes the risks facing these markets would create increased risk EPS revisions for Rio Tinto plc (ADR) (NYSE: RIO)
Johnson downgraded the rating on Rio Tinto to Sell, with a price target of $14.
Iron Ore Prices
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The analyst pointed out that analysis suggests that the global Chinese iron ore market is likely to be oversupplied by 206mt in 2016. Even if there is a balanced market in 2016, the Chinese market could still be oversupplied by 84 mt.
Johnson expects iron ore prices at about $30/mt by the end of 2016. However, given that the consensus expectations for iron ore price are higher, the analyst expects increased downside risk to the company’s EPS.
Copper Markets
Copper accounted for 15 percent of Rio Tinto’s EBITDA in 2015. At the same time, despite the 26.3 percent year on year decline in copper prices in 2015, Johnson noted that miners have not adjusted their aggressive forward ramp plans.
Supply is therefore slated to increase 4.1 percent year on year in 2016. “After 5yrs of supply deficits, we expect the next 5yrs, beginning in ’16, to be defined by unprecedented copper excesses,” Johnson stated.
Aluminum
Aluminum accounted for 24 percent of the company’s EBITDA in 2015, although prices fell 20 percent year on year.
“With cost-competitive Chinese projects slated to add an incremental 5 percent to global capacity,” Johnson expects aluminum prices to moderate.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.