Investors beware, the S&P/ASX 200 (ASX: XJO) (^AXJO) is coughing up a contagious iron-ore disease… it's called risk.
Yesterday, iron ore stocks continued their inflated run upwards despite Australia's biggest iron ore exporter reporting ugly results only last week. Traders are taking a hold of iron ore stocks and pushing the price higher thanks to a resilient spot price.
I can't remember a time when a company has reported 71% fall in earnings only to have its share price climb over 10% higher. Rio Tinto (ASX: RIO) has done just that. It's been a stellar run for traders but investors might want to be more cautious.
In the past six months, assets have been put on the chopping block left, right and centre but the assets that could save Rio aren't getting sold thanks to current market conditions. Its diamond business is arguably one of its more consistent businesses, particularly with rising demand from Asia's middle class. However when Rio put it up for sale, investors couldn't see the value in it.
Now, one of the most costly write-downs in corporate history has come back to haunt them — Rio's Alcan business.
In its interim report last week, the company said that Alcan will be integrated back into the company after it determined a divestment "for value is not possible". The write-downs of the business cost shareholders more than $10 billion and was rumoured to be the catalyst for the exit of former CEO Tom Albanese. It came at a time when the company also wrote down it its Mozambique coal business by $3 billion – another project Rio is putting up for sale.
In what seems another defining blow for the company which has a debt of $21 billion, its flagship gold and copper mine in Mongolia is suffering setbacks thanks to growing concerns from its partner, the Mongolian government. The government is concerned that the profit it will receive is getting cut away from its initial investment and has said the second stage of development should be funded through cash flow. Rio shareholders have been holding out for this project, which could become the third biggest gold mine in the world however its next phase of development is looking more and more unlikely every day.
If that wasn't enough for shareholders, its coal division is facing another troubling project in New South Wales. With a weakening coal price that is at three-year lows and with no recovery in sight, Rio stands to lose a further $600 million from its Warkworth project if its appeal in a Sydney court, due to be held tomorrow, is not successful. The project's expansion hopes were smashed when local residents successfully protested the disastrous environmental impacts of the mine at the New South Wales Land and Environment Court. Even if Rio is successful in Sydney, it will return to the environmental court and if that fails it'll have to lodge a new application.
Foolish takeaway
Rio Tinto has a poor history of decision making. It bought a huge aluminium business at the peak of its price and now it's expanding further into iron ore. A commodity that most analysts are saying will only go down in price as more and more mines come online and buyers respond to oversupply. This Fool thinks, at current prices, Rio is better left for traders and investors could grab a safer and much higher yielding stock in other sectors.
Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."
More reading
- Rio Tinto's half-year underlying earnings fall 18%
- BHP profit expected to drop 26%
- Buy stocks now, while they're cheap!
Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.