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MarketScreener Homepage  >  Equities  >  AUSTRALIAN SECURITIES EXCHANGE LIMITED  >  Rio Tinto Limited    RIO   AU000000RIO1

RIO TINTO LIMITED

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Fall in Copper Prices Threatens to Drive Metal Shortages

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08/09/2019 | 04:33pm EDT

By Amrith Ramkumar

The recent slide in copper prices threatens to limit investment in new mines, a trend that industry analysts and executives say could lead in coming years to sizable shortages of the material critical to manufacturing and renewable-energy projects.

Prices fell to two-year lows recently on fears that trade tensions will weaken the global economy and crimp demand. Because copper is heavily used in construction and manufacturing, its price movements are closely tied to momentum in the world economy, and particularly in China, which accounts for about half of global demand.

Some investors say the downturn in prices could actually lead to an even bigger rally years from now because of the time needed to extract metal from new projects. Many of those mines also require capital commitments to finish and are located in risky operating jurisdictions around the world.

Ore grades also decline over time, potentially leading to lower usable supply than expected as demand from electric vehicles and new technologies is likely to ramp up in the mid-2020s, analysts say.

Copper is now about 14% below the $3-a-pound level that investors say makes many long-term projects viable. It last closed above that level in June 2018, when President Trump approved tariffs on about $50 billion of Chinese imports.

"We have this great inventory of opportunities, but like other projects in the industry, they require prices higher than today's price to develop," Richard Adkerson, chief executive of copper miner Freeport-McMoRan Inc., said in an interview. "If global growth turns down, then we won't be in a position to invest in these resources."

Copper fell to $2.54 a pound on Monday, its lowest level since May 2017, before rebounding to $2.58 on Friday.

Jefferies projects a 1 million metric ton deficit in 2024 without more capital commitments from miners. Commodities consultancy Wood Mackenzie recently forecast a roughly 4 million metric ton supply gap by 2028, based on annual production of about 25 million metric tons at that time.

Driving those projections is a belief that copper will be critical to long-term shifts toward electric vehicles and cleaner technologies in transportation and energy storage. Electric and hybrid cars use more copper than conventional vehicles, and analysts project hefty demand increases from the implementation of EV charging stations. Fast-growing countries such as India also are expected to continue investing in copper-intensive infrastructure projects.

Another reason some investors remain confident that prices will eventually rebound: Operating mines in places such as Indonesia continues to come with a high degree of risk.

Many expect Freeport-McMoRan's success in the coming years to be defined by its ability to transition a giant copper and gold mine in Indonesia into an underground operation. Late last year, the Indonesian government took a 51% stake in the mine -- Grasberg -- by paying nearly $4 billion to Freeport and Australian miner Rio Tinto PLC. While the transition underground continues, Freeport is posting lower revenue and higher capital costs.

In another sign of the challenges facing miners, Rio Tinto last month said it will take much longer than expected and cost more to complete a mine in Mongolia's southern Gobi Desert.

The difficulties ahead for industry leaders Freeport and Rio Tinto could portend delays in the years ahead for other companies pursuing complicated projects, analysts say. While there are plentiful opportunities in countries such as Chile and Australia, extracting the metal could prove trickier than expected.

"These projects take a long period of time to bring on line," said Christopher LaFemina, a metals and mining analyst at Jefferies. "The market should be very, very tight as long as we don't have a recession."

Still, many investors say it is difficult to invest in the metal and shares of companies that produce it as trade uncertainty continues to hammer copper prices. They have fallen 13% from a peak in April. Shares of Freeport are down 36% in the past year following a nearly 4% drop on Friday. Other mining stocks such as Southern Copper Corp. have also taken a beating.

Hedge funds and other speculative investors pushed net bearish bets on copper to their highest level since November 2016 during the week ended Tuesday, Commodity Futures Trading Commission data show.

"Investors continue to be reticent about our sector," Mr. Adkerson said. "That's likely to be the case until there's some clarity on the direction of this trade issue."

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Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CRB COMMODITY INDEX 0.10% 195.01 End-of-day quote.0.00%
FREEPORT-MCMORAN INC 0.19% 10.47 Delayed Quote.1.55%
GOLD -0.12% 1512.53 Delayed Quote.18.32%
GRUPO MEXICO S.A. DE C.V. 0.52% 46.01 End-of-day quote.13.18%
LME COPPER CASH 0.23% 5758.5 End-of-day quote.-1.38%
RIO TINTO LIMITED -0.64% 92.44 End-of-day quote.18.57%
SILVER -0.05% 17.976 Delayed Quote.16.20%
SOUTHERN COPPER CORP -0.52% 34.49 Delayed Quote.12.09%
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Financials (USD)
Sales 2019 44 079 M
EBIT 2019 16 790 M
Net income 2019 10 006 M
Debt 2019 5 122 M
Yield 2019 8,64%
P/E ratio 2019 9,85x
P/E ratio 2020 9,94x
EV / Sales2019 1,22x
EV / Sales2020 1,29x
Capitalization 48 442 M
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Technical analysis trends RIO TINTO LIMITED
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Income Statement Evolution
Consensus
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Mean consensus HOLD
Number of Analysts 13
Average target price 63,43  $
Last Close Price 62,56  $
Spread / Highest target 25,0%
Spread / Average Target 1,38%
Spread / Lowest Target -32,0%
EPS Revisions
Managers
NameTitle
Jean-Sébastien Jacques Chief Executive Officer & Executive Director
Simon Robert Thompson Chairman
Jakob Stausholm Chief Financial Officer & Director
Ann Frances Godbehere Independent Non-Executive Director
Michael Gerard L'Estrange Independent Non-Executive Director
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ANGLO AMERICAN PLC7.30%32 682
GRUPO MEXICO S.A. DE C.V.13.18%18 420