Rio Tinto Limited (ASX: RIO) has seen its share price sink to the lowest levels in 5 years, currently trading around $38.49, and down another 1.7% so far today.
Just last week, the share price slumped to $37.75, its lowest level since 2009, and a long way off its all-time high of $124.19 reached in May 2008. Prior to that, we have to go all the way back to 2005 to find the last time Rio's shares traded around today's price.
Sinking commodity prices, particularly iron ore are to blame, although Rio also produces significant amounts of bauxite, aluminium, copper, coal, diamonds and titanium. Through its majority holding in Energy Resources of Australia Ltd (ASX: ERA) and the Rössing mine, Rio also has exposure to uranium. Other small contributors include borates and salt.
In the 2014 financial year, iron ore represented 75% of earnings, aluminium 11%, copper 8%, diamonds and minerals 4% while coal and uranium were -2%, and other assets contributed a loss of US$1.15 billion – representing 12% of total earnings.
In 2005, iron ore represented just 33% of earnings, with copper the largest contributor with 38%, as the chart below shows.
No wonder Rio is trying to offload many of its non-performing assets. Today the company announced the sale of its Mount Pleasant thermal coat assets to MACH Energy Australia for US$224 million plus royalties. Mount Pleasant is a large-scale coal asset in the Hunter Valley in NSW. The agreement includes a payment on completion of US$83 million, 2 deferred payments of US$58 million and a further US$25 million payment totalling US$224 million.
Rio will receive royalties equivalent to 2% of gross revenue of coal sold from the first 625 million tonnes – but only when prices exceed US$72.50 a tonne. Thermal coal prices are currently near all-time lows at US$43 a tonne.
Rio recently sold its 40% interest in the Bengalla coal joint venture to New Hope Corporation Limited (ASX: NHC) for US$606 million and in June 2014 completed the sale of its 50.1% interest in the Clermont coal mine for US$1.015 billion. The miner has now divested US$4.7 billion of assets since January 2013.
While those sales should act to stem the flow of earnings losses, Rio looks headed to reporting its lowest underlying earnings in a decade when it reports results for the 2015 financial year towards the end of February 2016.
Foolish takeaway
As the saying goes, 'where earnings go so to do share prices', and Rio may well see its share price decline further from here as earnings sink. Analysts are in fact forecasting around a 50% fall in earnings per share for the 2015 financial year (FY15) – and another 50% fall for FY16.
Look out below.
