Rio Tinto's growth is at risk

The warning bells are loud and clear.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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


Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »