The Investment Column: Asia crisis puts a dent in Rio Tinto
Friday 27 February 1998
When you're in a commodity business, however, certain basic factors - such as prices - are beyond your control. And since economic turmoil first rumbled across Asia last autumn, metal prices have slumped. The copper price, for example, has dropped by over a quarter to less than 80 cents a pound. Given that every 10-cent-a-pound fall wipes $100m off Rio Tinto's bottom line, it's no surprise that the company's shares slipped from pounds 10 to pounds 7 in just three months, although they have since staged something of a recovery. They closed up 22p at 812p yesterday.
Potential investors need to ask themselves two questions. First, to what extent will the Asian crisis dent the company's profits? Second, how much of that gloom is already reflected in the share price? Yesterday, Mr Wilson had a pretty good stab at convincing shareholders the crisis is not as bad as it looks. Although 40 per cent of Rio Tinto's sales are in Asia, half of that is in Japan. What's more, even though prices have dropped, sales volumes are still expected to rise in the coming year.
Nevertheless, the impact on economic growth in the West remains unclear. The drop in metals prices has also prompted Rio Tinto to rethink several potential investments, although it claims that all current projects are going ahead.
So the company is thinking of other things to do with its cash. Mr Wilson acquisition opportunities may pop up. Rio Tinto also has permission to buy back 10 per cent of its shares. In the UK, the company will have to wait until Advance Corporation Tax is abolished next year before it can return cash to shareholders. In Australia, however, it's more likely to do so sooner.
Uncertainty about macroeconomic conditions shows up in the spread of profit forecasts for the coming year, with rival analysts forecasting anything from a 10 per cent fall in profits this year to a 10 per cent rise - which translates into a forward p/e ratio of between 14 and 18. The 4 per cent dividend yield is some consolation, but for the time being these shares are effectively a punt on global economic conditions, and are no better than a hold.
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Weather bomb in pictures: Storms cuts power for tens of thousands – and snow is on the way
Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
Russell Brand was rendered speechless on Question Time by this man
Fury at Airbus after it hints the super-jumbo may be mothballed
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
iJobs Money & Business
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...
£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...