The Investment Column; Rio's markets bottom out

IT WAS only six months ago that mining stocks were languishing close to their lows as commodity prices sank to new depths. How things have changed. As Rio Tinto commented yesterday, the pricing outlook is now better for several of its commodities as the US economy powers ahead and Asia begins a recovery. Better prices and improving demand have prompted a re-rating of mining shares, with Rio Tinto's shares rising by more than 50 per cent since the start of the year.

They closed unchanged at 1,131p yesterday even though several analysts upgraded their forecasts; one broker put a 1,400p target on the stock.

Interim results do not fully justify such bullishness, however. Net earnings fell 8 per cent to $509m - the recovery in metals prices is yet to feed through. Rio's iron ore, copper, industrial minerals and aluminium divisions all saw lower profits. Only energy and gold improved returns. Prices of copper, aluminium and silver were down 17 per cent, 11 per cent, and 13 per cent respectively on the same period last year. The company says there will now only be a further 10 per cent downside in the gold price as many produces are selling their output below cost.

As the sector's markets bottom out and start to recover, Rio reckons it has a portfolio of assets much improved following heavy investment. Falling commodity prices have been offset by a cost-cutting programme which has delivered $517m of savings in the last two and a half years.

The continuing assault on costs, coupled with a sliding capital expenditure programme, indeed places the company well should market conditions improve. The problem is that much of this is already in the price.

On WestLB Panmure's full-year earnings forecast of $1,075m, the shares trade on a forward rating of 22. There is much expectation in the shares, and impatient investors may wish to take some profits. But Rio has emerged from the commodities crisis leaner and fitter. Investors in there for the long-term should hold on to the shares.

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