Rio Tinto Eyes to China

As a foreign supplier to the Asia-Pacific region, Rio Tinto Plc (RTP - Analyst Report) is benefiting from China's status as a net importer of iron ore. The company is focused on boosting output to meet China's increased consumption levels. Moreover, with a positive outlook on most metal prices, we expect solid long-term revenue growth.

The company's primary focus remains on organic growth, exploration and opportunistic value acquisitions. With the acquisition of Alcan Inc., Rio has become a global leader in the aluminum industry with large, long-life, low-cost assets across the globe and a strong pipeline of attractive growth projects.

However, cost pressures due to ongoing supply constraints are adversely impacting Rio's margins and profitability. Also, significant capital spending on its expansion and development projects might put pressure on near-term free cash flow generation. We reiterate our Hold recommendation on the stock.

On September 2, Rio Tinto announced that it has signed two joint venture agreements with CODELCO's 100% owned subsidiary, CCM Los Andes, in Chile. These agreements follow an earlier exploration joint venture agreement signed between Rio Tinto and CODELCO in January.

At the current price of $268.50, the stock trades at a P/E multiple of 8.4x our 2008 EPADR estimate of $31.87. Even though we saw record earnings growth in 2007 and 1H08, fear of a global economic slowdown makes us take a cautious view on the stock. The stock is fairly valued at around 8.8x our 2008 EPADR estimate.

Read the full analyst report on RTP