Rio shares hit Peak Rebound

The $100bn iron ore miner produced blockbuster earnings and cash flow after commodity prices defied gloomy demand forecasts, but it was not a major buying signal for investors. Shares initially fell 0.5% after the results on Wednesday. They then rose slightly. After all, the group had just handed out a record dividend and forecast global manufacturing growth would buttress returns in the year ahead. That was on top of a 69% rise in underlying profits to $8.6bn and a $9.7bn planned share buyback. But shareholder applause remained muted. It’s also evident that since a 103% advance over about two years, the stock has lost steam.

Peak priced-in

What accounts for this? Well with solid earnings, cash flow generation and a steady reduction in net debt and improving margins throughout its last financial year, Rio Tinto had few further positive surprises to report. Some investors may have been expecting a larger buyback, though the one announced on Wednesday will account for slightly more than all of fiscal 2017’s free cash flow. Additionally, whilst prices of iron ore – Rio’s biggest commodity – and other minerals have confounded pessimism, they remain a risk. Iron ore prices are up 69% over two year; coal has risen by over 100%. Regardless of signs Rio has grabbed Chinese market share, a recently chastened mining industry is cautious about the base metals outlook. Reflecting that, Nymex iron ore’s forward curve indicates prices could fall $10 from current levels to about $63 per tonne.

Growth and value needed

It may also be that the new conservatism sweeping global miners including Rio is beginning to show. The fault of Rio’s virtues is now that it has no projects in the pipeline that will exponentially increase production. CEO Jean-Sébastien Jacques has been lauded for choosing value over growth. But eventually growth will have to be sought in almost equal measure, particularly after the group last year disposed of its most obviously non-core assets. It also made no mention of a potential sale of high-cost aluminium-smelting operations housed in its Pacific Aluminum following speculation last year. Talk was an exit could have raised $2.8bn.

FTSE mining crunch

With all FTSE mining giants facing a growth crunch to some degree, investors could soon find it difficult to know where to jump. Anglo and Glencore could begin to look less attractive solely based on their runs of some 300% in two years, though prices of most shares in this group are up in triple-digit percentages. That suggests most FTSE mining shares could drift lower unless these groups define growth strategies more concisely – and perhaps more boldly.

BHP Billiton half-year results - 20th February
Glencore full-year reports - 21st February
Anglo American full-year results - 22nd February

Thoughts on share price technicals

Rio’s highest price since beginning to recoup following the 2014-2015 base metals price rout was marked last month at 4189.5p, slightly above a prior cycle top of $4029p from February 2012. Obviously failure to hold these levels and in fact to dip back beneath them reveals that both continue to be keenly watched by investors—resistance is implied. The retreat has however this week hit and even tested the underside of a closely adhered to rising line that commenced in January 2016. We can see that there have been a number of incursions beneath since then, though none preceded a clean break below. The 200-week moving average line (blue) as a litmus test of underlying support is well below the price. It has also taken on a gently rising gradient for over a year. Prospects look hopeful, if not guaranteed. The real test of support may lie in the months ahead though. Price will reach the apex of triangulation between the rising line and 4029p resistance no later than mid-May.

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