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On January 22, we downgraded metal mining giant, Rio Tinto Plc. (RIO) to Underperform based on the company’s huge write down of assets relating to its coal and aluminium business.

Why the Downgrade?

On January 17, the company announced a possible impairment of assets to be charged in fiscal 2012. The write down includes roughly $3 billion for assets relating to the Rio Tinto Coal Mozambique, whereas an exorbitant amount of $10-$11 billion relates to the aluminium business of the company. Along with this, Rio also expects additional smaller write-downs in the quarter.

It is anticipated that the current write down of assets will have a negative impact on the full year 2012 results as well. The company expects to announce results for the full year on February 14, 2013. The Zacks Consensus Estimate stands at $2.86.

With a Zacks Rank #3 (Hold) and Zacks Earnings Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Method) of -10.84%, Rio is less likely to beat earnings next quarter. Moreover, this stock has mostly seen downward estimate revisions in the recent past. Estimates for year 2012 declined 0.2% to $5.59 per share over the past 90 days, while that for fiscal 2013 declined by a much higher percentage of 5.9% to $6.10, over a period of 90 days.

Rio also posted weak results for the half year 2012 with sales of $25.3 billion, down 12.8% year over year. Also, the earnings per share dropped 22% year over year to $3.16 per share, for the half year 2012.

Cause for Concern

The company operates in a highly competitive industry, which is impacted by micro factors such as price, quality and costs along with macro factors such as government delays on permit issues and tax policies. Also, in a scenario, where volatility in terms of demand and prices persists, it is difficult for the company to sustain and grow its margins and earnings.

Other Stocks to Consider

While we remain bearish on Rio, other companies that are worth considering are Impala Platinum Holdings Ltd. (IMPUY), BHP Billiton Plc. (BBL) and Denison Mines Corp. (DNN); each holding a Zacks Rank #2 (Buy).


 
BILLITON ADR (BBL): Free Stock Analysis Report
 
DENISON MINES (DNN): Free Stock Analysis Report
 
(IMPUY): ETF Research Reports
 
RIO TINTO-ADR (RIO): Free Stock Analysis Report
 
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Zacks Investment Research
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Zacks Investment Research

Zacks Investment Research Inc. is an equity research firm. It offers research through quantitative and qualitative analysis. The firm caters to individual and institutional clients. Zacks Investment Research Inc. was founded in 1978 and is based in Chicago, Illinois.