Twelve months ago, analysts were forecasting 2014 earnings per share (EPS) for Rio Tino (LSE: RIO) (NYSE: RIO.US) of 355p, which would have represented a small rise over 2013. But since then, theirpredictions have been slashed to just 309p for an 11% fall from last year.
And 2015 expectations have suffered similarly, with a cut from 369p per share on the cards three months ago, to just 296p today. Thats a further EPS fall of 4% on top of whats expected this year, so whats been going wrong?
Oversupply?
For one thing, fears of an oversupply of key metals and minerals have been growing, and the expected (but not yet actually observed) slowdown in China would hit demand quite hard. And with around 50% of Rio Tintos turnover coming from iron ore, it would be one of the miners hurt by any glut.
Whether or not we really do suffer a global oversupply remains to be seen, but the global iron ore price has been in a slump. From $137 per tonne a year ago, the price has tumbled to around the $80 mark today, and some analysts are even predicting a fall as low as $50-60. Rio Tinto forecasts have pretty much been tracking the iron ore price downwards.
Rising earnings
Despite that, Rio reported a 21% rise in underlying earnings to $5.1bn for the first half (although in sterling that will be less due to currency exchange movements), with underlying EPS up 21% to 276.8 cents. And though per-tonne prices are falling, Rio has been producing and, more importantly, shipping record quantities of iron quarter-on-quarter.
Its been helped by rising aluminium prices, too aluminium was Rios second-biggest contributor to turnover in 2013, at more than 20%.
How do these competing pressures add up to a valuation of Rio Tinto shares? At the 2,980p level theyre on a forward P/E of under 10 for this year, rising a little to 10.2 based on 2015 forecasts. Dividend forecasts are actually strengthening, and the City is expecting yields of 4.4% and 4.7% for this year and next.
And thats enough to have a big majority of analysts issuing Strong Buy or Buy recommendations, so we could be looking at bargain times in the mining business.
Takeover?
Glencore apparently thinks Rio Tinto is undervalued right now, having made an approach regarding a potential merger of the two companies, and things like that tend to happen when the approached company is seen as being cheap.
We could well have see more such attempts in the coming months.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
