The Investment Column: Asia crisis puts a dent in Rio Tinto

SPARE a thought for Robert Wilson. For most of 1997 the chairman of Rio Tinto, the world's largest mining group, thought he was doing quite a good job. The benefits of the 1995 merger with CRA, the Australian group, were beginning to flow through. In fact, Rio Tinto now reckons the combined companies will save $300m a year on costs - $50m more than it had previously calculated.

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.