Market Report: Rio Tinto slides further amid debt fears

A number of leading miners fell back following fresh falls in commodities prices last night.

Rio Tinto was the hardest hit amid renewed concern about its debt-laden balance sheet and rumours of a possible rights issue. Denials from the company failed to halt the slide with the stock ending down 9.61 per cent, or 122p, at 1148p. Xstrata was down 4.96 per cent, or 36p, at 690.5p as credit derivative spreads on the 35 per cent shareholder Glencore continued to widen to record levels.

Lonmin was down 2.21 per cent, or 15p, at 663.5p after Goldman Sachs reduced its target price for the stock to 522p from 565p. The broker also changed forecasts for the platinum group metals to take account of weakening global demand. “A platinum market surplus means we expect platinum prices to remain low and, with lower production and higher interest costs, we expect Lonmin’s earnings to fall sharply in 2009,” the broker said.

Elsewhere, oil majors, including BG at 799.5p, down 28.5p, and BP at 506p, down 2.75p, were also on the back foot after commodities eased and JP Morgan reduces its oil price assumptions for 2009. The broker said it now expects West Texas Intermediate to trade at $69 per barrel next year, compared to an earlier estimate of $75 per barrel, adding: “We see sector returns to fall from 23 per cent in 2008 to 16 per cent in 2009 before reverting to the mean of 18 per cent in 2010.”

Overall, a firm start on Wall Street helped the FTSE 100 close up 47.1 points at 4,169.96.

The FTSE 250, which is seen as more reflective of the domestic economic picture, was down 11.45 points at 5,848.94. Sentiment remained weak with UBS forecasting a 15 per cent fall in company earnings in 2009. The broker said: “Dividends could fall by at least as much as earnings.”

Stagecoach fared the worst on the Footsie, losing 16.5 per cent, or 28.3p, to 143.2p after posting a cautious outlook with its interim results, warning that its rail business was vulnerable to the ensuing economic slowdown.

In response, Merrill Lynch said: “We think Stagecoach could be the most exposed operator to slowing or negative passenger growth due to a high proportion of revenue from ticket sales and more rail operations than the sector average.”

The read-across unsettled the wider sector with First Capital Connect’s owner FirstGroup trading down 8.2 per cent, or 35.25p, to 394.75p, and National Express, the operator of the Stansted Express service, losing 8.69 per cent, or 47.5p, to 499p. Go-Ahead, which runs the Gatwick Express, was down 13.14 per cent, or 154p, at 1018p.

Traders were sceptical about rumours of a possible rights issue from Rentokil Initial, the pest control and business support services group that was down 4.35 per cent, or 1.5p, at 33p. The speculation follows reports that the business was working with the investment bank NM Rothschild to line up a replacement for a loan that matures in 2010.

HMV fell back, down 11.89 per cent, or 14.5p, at 107.5p as the impact of a recent short squeeze wore off. HSBC, which downgraded the stock to “neutral” from “overweight”, exacerbated the decline, saying: “UK consumers have just not picked up on a great autumn release schedule.”

Michael Page was unsettled, losing 3.62 per cent, or 7.25p, to 193p, after Deutsche Bank reduced its target for the stock to 131p from 172p. Reiterating its “sell” stance, the broker also reduced its earnings estimates for the staffing group, saying: “Michael Page is more operationally geared than other staffers because of the high level of gross profit coming from permanent recruitment (73 per cent) and as such employment markets have a more dramatic effect on their operating profits.”

Among smaller companies, JJB Sports slumped to 13p, down 13.33 per cent, or 2p, amid concern about the possible impact of the Office of Fair Trading’s enquiries into Sports Direct’s (OFT) stake in the company.

Altium Securities said that, to the extent that there was little chance of a bid from Sports Direct in the first place, the move does not eliminate bid support from the share price. But it bodes ill for the prospect of a bid from JD Sports, the rival retailer that recent acquired about 10 per cent |of JJB.

“An OFT investigation of a Sports Direct stake must heighten the chances a JD acquisition would be blocked,” the broker said, adding that even if the market did not anticipate such a bid in the current share price, the investigation was negative in that it increases the chances that the two stakes might have to be sold, causing “a substantial stock overhang”.