On Nov 21, 2013, we upgraded our recommendation on Rio Tinto plc (RIO) to Outperform from Underperform, based on the company’s recent expansion initiatives.
Why the Upgrade?
Rio Tinto has been successfully streamlining its business activities to focus on core competencies. The company is also extending its operations in lucrative areas. In October this year, Rio Tinto started production from the recently expanded Pilbara mine, the production capacity for which has recently hiked to 290 million tonnes a year.
Additionally, in July, the company commenced coal production at the $2.0 billion Kestrel Mine Extension, which will add 20 operational years to the mine.
The company keeps a tight check on its costs. Rio Tinto plans to cut expenditure on exploration and evaluation by $750 million in 2013, wherein $729 million has already been reduced in the first nine months of 2013. Considering this progress scale, we expect the company to generate higher margins in the coming quarters.
Additionally, the damage estimated due to the wall slide at Kennecott Utah Copper’s Bingham Canyon Mine is narrowed, due to a faster-than-expected recovery. The construction of the new heavy vehicle access road is likely to complete in the fourth quarter of 2013, enabling additional production along with remediation and waste movement.
Subsequent to the third-quarter 2013 production report, the Zacks Consensus Estimate for 2014 has increased 7.7% to $5.18 per share in the past 60 days, reflecting a year-over-year growth of 7.6%.
Other Stocks to Consider
Rio Tinto currently carries a Zacks Rank #1 (Strong Buy). Other stocks worth a watch in the mining industry include Augusta Resource Corp. (AZC), Dominion Diamond Corp. (DDC) and North American Palladium Ltd. (PAL). All these carry a Zacks Rank #2 (Buy).
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