Rio Tinto Limited’s warning to resources investors

Rio Tinto Limited (ASX: RIO), the world’s second-largest mining company, issued an indirect warning to all resources investors overnight.

An email, dated January 12, obtained by Bloomberg News suggests all Rio Tinto employees, from CEO Sam Walsh down to its contractors, will have their salaries frozen as the commodity price rout worsens.

“The pressure this is placing on our industry is significant and it is a tough time across the sector,” Bloomberg reported Mr Walsh as saying. “Not only is China’s economic growth more modest, it has shifted emphasis from metals-intensive sectors – like infrastructure and construction – to consumer spending.”

Rio Tinto is a global heavyweight across commodities such as iron ore, copper, coal and aluminium. Unfortunately, in the wake of China’s transition to a consumption-based economy the prices of these commodities are falling – hard. This morning, BHP Billiton Limited (ASX: BHP) announced a $10.31 billion write-down of its US oil and gas assets as a result of the large falls in oil prices. Rio may also be required to do something similar for its assets if commodity prices remain depressed for longer than expected.

Dow Jones Newswires quoted David Outhwaite, a Rio Tinto spokesperson as saying, “As part of the focus on cash, from the CEO down, we are implementing a salary freeze for 2016. Of all the actions we are taking, this decision was one of the most difficult, as it doesn’t reflect the hard work or effort put in by our employees. But it is necessary given the market context.”

Foolish takeaway

Rio Tinto’s progressive dividend policy has come under intense scrutiny in recent times as investors fear the fallout in commodity prices will result in the miner slashing its payout in order to save cash. In my opinion, BHP’s huge write-down this morning coupled with Rio’s freezing of employee wages is a warning sign that tougher times may lay ahead for the resources sector.

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Motley Fool writer/analyst Owen Raszkiewicz has no position in any stocks mentioned.

Owen welcomes your feedback on Google plus (see below), LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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