3 reasons not to buy Rio Tinto

No buyers, dropping prices and debt – it’s not worth the risk?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Rio Tinto (ASX: RIO) has been unloved by shareholders since its $150 highs back in 2008. Post GFC, the company has been in damage control mode, selling more than US$5 billion worth of assets, but they still need to offload more. A reduced demand, coupled with higher global supply of many of their products and increasing debt, have all made Rio less attractive to investors.

Demand

As demand for Rio’s products like iron ore and coal falls, the price drops. Over the past year demand for both commodities has reduced significantly and we have seen pure play iron ore and coal companies fall in a heap. Fortescue (ASX: FMG), a pure play iron ore company that sells 97% of its product to China, has fallen approximately 38% in value. Likewise, Whitehaven (ASX: WHC), a pure play coal company, has fallen from above $4 a share to around $2.20.

Today, Rio announced that it will be looking for whole or partial suitors for its Mozambique coal unit, worth an estimated US $700 million. This has produced nothing but poor returns for the company since it purchased Mozambique-focused Riversdale Mining for $3.7 billion in 2011. After significant cost blowouts, the company was forced to write down the project to $3 billion.

Supply

Earlier this year, Goldman Sachs (NYSE: GS) said that total iron ore exports, by far Rio’s most lucrative commodity, will surge from 1.15 billion tonnes this year to over 1.5 billion tonnes by 2015. This includes Australian capacity which is set to rise from 560 million tonnes to 780 million tonnes.

Increases in supply from the world’s biggest miners like Rio, BHP (ASX: BHP), Fortescue and Vale (NYSE: VALE) will account for only two-thirds of the increases until 2017, meaning more big mines will come online in the near future. It’s a double-edged sword for Rio with both demand decreasing and supply increasing.

Asset sales and debt

Although Rio does not have the staggering levels of debt that Fortescue holds, it is still in need of capital to help its balance sheets. CEO Sam Walsh came into power only months ago and has already begun selling non-core assets worth hundreds of millions of dollars, to reinvigorate the balance sheets and prepare for lower prices. Its report for the year ended 31 December 2012 showed a loss of $3 billion dollars after impairments of $14 billion, despite record iron ore production and shipments.

After scraping plans to sell its diamonds business because of a failure to find suitors, the company now has to put its coal assets on the chopping block, but after such a tough year in the commodity, who’d want to buy it? This week we’ve seen Xstrata announce jobs cuts at its Ravensworth coal mine in NSW, blaming a slowdown in demand for coal hinting that it may be tough to find buyers.

Foolish takeaway

The next annual report will provide a keen insight into the company’s current condition and revenues. Investors hoping for a cheap bargain now have the option to purchase bank shares, which pay higher yields and carry less risk since dropping in price over the past two months. Investors will be wise to keep their distance from Rio, until we know how the recent asset sales have affected long term growth prospects, the debt and its balance sheets.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


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

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »