Rio Tinto PLC needs a strong global economy to move higher

Aug 19th, 2011 – Comment

With a death cross on the chart, the momentum indicators turning lower, and investors in a selling mood I think that caution would be the better part of valor.


About the Author

Lou Schizas is an equities analyst, investor, entrepreneur, professor and television and radio personality – and a true believer in the happiness-inspiring powers of capitalism.


Read the author's full profile.


Further Research

Read more about Base Metals.


 

 

Hi Lou ,

 I’ ll be brief…I would appreciate getting your current opinion on Rio Tinto. Considering a current P/E of 8.4 in addition to the size of the company, isn’t it time to buy ?

Thanks,

Robert

 

Hi Robert,

 

Thanks for the assignment. Rio Tinto PLC (RIO NYSE) is a global mining giant with interest in iron ore, bauxite, alumina, aluminium, copper, diamonds, coal, uranium, and a host of other resources. In 2007  the company bought Alcan for $38.1 billion and had to strap on lots of debt to get the deal done.

 One of the things that I like about RIO is that they continue to dig for new efficiencies in their operations. Their development of HIsmelt technology to improve the economics of processing iron ore fines is just one example of their focus on continuous improvement. The iron ore group contributes 68% of the operating cash flow of the company. The forecast is for continued tight supply against existing demand for the ferrous metal.

Here’s the rub. RIO is an economically sensitive stock. It rocks when global growth is on an uptrend and suffers when growth slows. The price earnings ratio for the stock is low relative to its historical trend and also below the price earnings ratio for the basic materials sector. The question is does the price earnings ratio indicate value or a value trap?

The charts will provide a sketch of the prospects for the stock.

 

 

 

The three year chart tells the tale of a stock that had been treading water for the last ten months.  A range bound pattern was established with support at $65.00 and resistance at $72.50. Profitable for traders not so much for buy and hold investors.

When I look at the time frame it brings back a conversation I had with my pal Darryl Simsovic from Item Corporation.In  November of 2010 we were discussing the Fed decision to pump another $680 billion into the economy through their second round of quantitative easing. At that point it was clear that all the previous efforts to spur growth in the US had not met the policy objectives. The evidence suggested that the global economy was being fed by monetary stimulus and there was insufficient real organic growth. The conclusion I came to was that we were running on fumes and that companies that depend on the health of the economy could not move higher without real demand.

 

 

 

 

The six month chart defines the support at $65.00 which was breached in August as investors got spooked by a multitude of factors. These include the debt ceiling debacle, the sovereign debt issues in Europe, and S&P’s rating cut on U.S. debt. The RSI and MACD are both currently turning lower so the bounce off of $52.00 will need some great effort to be sustained.

With a death cross on the chart, the momentum indicators turning lower, and investors in a selling mood I think that caution would be the better part of valor.

 

Make it a profitable day and happy capitalism!

 

 

 

Categories: Base Metals
Content © Relentless Economics - Charts courtesy Stockcharts.com - Employees Entrance - Optimization Media