Investment: Metal prices dent Rio Tinto

METAL PRICES are normally high when metal stocks are low and vice versa, so the current situation makes no sense to Rio Tinto chairman Brian Wilson. Stocks are still on the low side, but copper prices fell 30 per cent in the past year to their lowest level in real terms since 1933. Gold, aluminium and coal prices also weakened, slashing $278m (pounds 165m) off the company's profits in the first half of 1998.

Metal traders suggest that sustained speculative selling by hedge fund operators is the mystery factor driving metal prices down. If this theory is correct, it makes no sense for speculators to force producers out of business, and every sense for them to switch sides and drive prices sharply higher once the turning point has been reached.

In the meantime Rio Tinto is a natural hedge because large chunks of its cost base are in weak currencies like the Australian dollar, the Canadian dollar and the rand, which gives Rio Tinto a natural hedge and added back $124m (pounds 74m) to profits. Take in another $107m (pounds 64m) worth of cost savings, a modest rise in volume, and margins on sales were actually little changed at 23 per cent. Turnover fell 5 per cent and pre-tax profits were only 8 per cent lower at $942m (pounds 560m). Earnings increased in four of the six divisions, industrial minerals, iron ore, aluminium and energy, while copper and gold were the only two which failed to shine.

The shares shed another 22p to 600p yesterday. But analysts are still expecting profits of pounds 900m in the full year, rising to pounds 1.03bn and earnings of 60p a share in 1999. Size and diversity give Rio Tinto an extra resilience, and at just 10 times prospective earnings in 1999 only a meltdown would stop them looking cheap.