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Rio’s golden makeover stalled

Rio Tinto (ASX: RIO) and other resource stocks like BHP Billiton (ASX: BHP) and Fortescue (ASX: FMG) are trimming the fat in a bid to save on costs and return to shareholders.

Last week, Citigroup (NYSE: C) raised Rio to Overweight. This comes as the company has started to act upon shareholders’ concerns and trim away poorly conceived projects, staff and non-core assets. It started with the yearly report for 2012 which showed the company’s recent performance slumped and resulted in a $3 billion deficit.

New CEO Sam Walsh has begun focusing on strengthening the capital base, reducing costs, improving performance of existing projects and delivering on approved growth prospects. Mr Walsh has certainly ticked most of the boxes. In the past month he has approved the sale of its Eagle project in the US, raised billions in capital through bond selling and has put non-core assets up for sale. However, the company is continually battling with growth concerns.

The company’s Oyu Tolgoi gold and copper mine in Mongolia is expected to bring in precious revenue by starting a new and exciting venture with huge amounts of gold and copper. Rio has laid out significant capital for the project and approved all the necessary filings but the project has been stalled by the government, which currently owns 34%.

Last week, the government requested the project be stalled and it looks likely that it will not be fully operational until elections are held and disagreements on costs can be negotiated. The government is concerned that cost blowouts may affect the feasibility of the project, particularly when ‘phase 2’ commences.

Phase 2 of the project would enable Rio to become the third biggest producer of copper in the world. Something that Rio would be very pleased with, particularly as the company tries to reduce its dependence on falling iron ore prices.

Foolish Takeaway

Rio’s current money maker is iron ore but it is essential that the company creates a new image as a diversified miner like BHP. Until the company can prove to investors that it can save money and show solid growth prospects, investors may be wise to keep their distance.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.

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