We prefer BHP over RIO

Rio Tinto reported their June quarter production which was in line with market consensus.

If we assume a slight softening in Iron Ore prices next year, (back below US$100 per tonne), RIO will produce $45bn in FY20 revenue and generate EBITDA of $20bn. Underlying reported FY20 profit will be $10bn, which will sustain a 5.5% yield based on dividends per share of $4.50.

Within the resource space, we continue to prefer BHP over RIO and within the energy complex WPL and ORG.

We also like the look of Oz Minerals.

 

 

Iron Ore – BHP, RIO & FMG

Spot iron ore prices have rallied in the past days on the news of a second catastrophic tailings dam failure at a Vale-owned mine in Brazil.

Exceptions of reduced supply impacting the market, has driven up short term spot prices. Although, Iron Ores prices have been on a steady climb since the November low.

Long-term Iron Ore price chart.

We remain cautious of a potential pullback in RIO, BHP and FMG following the run up in prices and Algo Engine sell conditions.

Our preference continues to be in the energy names with OSH and WPL our core exposures.

 

ALGO Sell Signal For Rio Tinto

Our ALGO engine triggered a sell signal for RIO Tinto into yesterday’s ASX close at $79.50.

This “lower high” pattern is referenced to the intra-day high of $82.20 posted on August 1st.

RIO has also been removed from our ASX Top 100 model portfolio after achieving a 29.50% gain (and over $5.00 in dividends) over the last 569 days.

Since trading as low as $69.40 on September 6th, RIO’s share price has rallied over 15% in less than two weeks reaching a high of $80.00 on Friday.

We believe two of the reasons for the recent investor interest are the stabilization of the raw materials market and the announcement of RIO’s massive share buy back scheme.

According to a company release, RIO plans off-market purchases of up to 41 million of its ASX listed shares as well as on-market purchases of its UK listed shares.

In total, the plan could equal over $4.5 billion in capital returned to share holders.

As such, we feel the strong fundamentals driving the recent surge in the stock price will result in a near-term consolidation, as opposed to a change in trend to the downside.

Rio Tinto

 

 

Buy RIO – Value On Offer

Our Algo Engine generated a buy signal recently in RIO following the “higher low” formation at $71.00

RIO will soon complete US$11 billion +  in  asset disposals and further realization of their portfolio is likely. With net debt now at historically low levels, we expect the bulk of this cash to be returned to shareholders via buy-backs and dividends.

Iron Ore prices appear to be steady at around US$63 p/t. We recommend accumulating RIO shares within the $65 – $73 range.

RIO