Problems take shine off Rio Tinto

The Investment Column

Rio Tinto, the mining group which used to be called RTZ, has suffered some unaccustomed hiccoughs over the past year or so. The Sumitomo scandal, which saw copper prices slump last year, was not of the group's making, but a range of other problems closer to home have taken the shine off the group's normally slick image. Coinciding with the integration of CRA, the Australian associate with which it merged last year, the shares have underperformed the market by 16 per cent since the beginning of 1996, dropping 29p to 996p yesterday.

The cause was probably disappointment over the interim dividend, which has effectively been cut as a result of Rio's decision to declare its results in dollars. So although the group announced a flat payout of 16.5 cents yesterday, the gain in the value of the pound since last year means that the sterling equivalent of the payment has been cut 2.2 per cent to 10.37p.

But Rio is also trying to rebuild cover, which was 1.5 times in dollar terms last year. Exchange and cover will reverse in time. More important is the outlook for earnings, which, rising 9 per cent to $975m (pounds 599m) at the pre-tax level, were broadly in line with expectations in the six months to June.

There are grounds for hope there. Rio appears to be getting to grips with the high costs in Comalco, the Australian aluminium operation. It is also taking a hard line over its coal operations in New South Wales. In total, cost savings following the CRA merger should be running at their full rate of $250m by next year.

Trickier to call is the Kennecott smelter at the Bingham Canyon mine in Utah. Lost profits could be as much as $100m this year, after $150m in 1996.

The effects of Rio's rising output were clear from the interim figures, with higher gold and copper production at Kennecott and capacity increases at the Escondida mine in Chile feeding into a pounds 144m earnings uplift from sales volumes. That momentum should be maintained into the second half, with higher copper prices to boot. The real clouds come from the Far East, in the extent of Chinese buying of copper and how much demand is lost if growth falters in the tiger economies. Full-year earnings of $1.4bn would put the shares on a forward p/e of 16. Hold.