On Wednesday, the company reported a 2% decline in underlying earnings to US$18.13bn for 2018 and announced a record US$13.5bn payout to shareholders, including a US$3.1bn final dividend and a US$4bn special dividend.
Bank of America said the results were “solid” and in line with market expectations.
It said catalysts supporting the share price in the past 12 to 18 months include the US$13.5bn capital return, the exit of the somewhat controversial Grasberg copper asset in Indonesia, the disposal of coking coal assets and the withdrawal of the Dunkerque smelter in France, the sale of Kitimat wharf and land, the exit of coal and allied thermal coal assets.
“From here, with iron ore trading at a fairly high level and no more catalysts, we see downside risks to shares,” the investment bank said, adding that investors could be ready to “book” shares.
Bank of America lowered its rating on the stock to ‘underperform’ from ‘neutral’ and cut its target price to 4,150p from 4,770p.
The bank noted that Rio’s management has indicated that the asset disposal process has been largely completed and is starting to see a switch towards organic growth.
“In our view, this is necessary but it is inherently riskier than Rio’s ‘shrink to grow’ approach to value realisation,” it said.
Quiet period in Chinese steel production
Rio claims 2% volume growth from projects in iron ore, aluminium and copper but Bank of America thinks that this “isn’t enough to drive the share price materially from here”.
The bank also considers potential delays to Rio’s copper growth project, Oyu Tolgoi, related to ground conditions in the block cave.
It sees risks stemming from China amid a slowdown in economic growth and trade tensions with the US.
“We see Chinese steel production in 2019 flat/small down vs. 2018. Seasonally, we are entering a quiet period between Chinese New Year (Feb 6th) and the end of China’s NPC (mid-late March) .”
Shares fell 2.4% to 4,317p in morning trading.