Broker snap: Rio's one of the top sector picks, says Jefferies

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SymbolPriceChange
CRA1.BE39.97-3.03

LONDON (ShareCast) - Jefferies has reiterated its 'buy' rating and 4,000p target price for mining giant Rio Tinto (Berlin: CRA1.BE - news) following yesterday's investor seminar in which the company announced aggressive open and capex cuts.

Rio is intending to make $5bn of cumulative operating and support cost savings by the end of 2014 with a run rate at the end of this period well above $3bn per year.

Jefferies said: "Even if Rio's operating margins (before the announced cost cuts) do not improve from 2012 levels, we estimate that the company is positioned to deliver 40% EPS growth over the 2012-2015 period as a result of these cost cuts and volume growth. Contrary to popular opinion, the Rio earnings outlook is therefore not entirely dependent on the iron ore price."

The broker also said that economic data from China is getting better with industrial growth accelerating:

"Increased fixed asset investment should lead to stronger steel demand and higher iron ore prices in 2013. Other commodities are also likely to benefit from stronger Chinese demand next year.

"For Rio Tinto, the combination of higher volumes, higher realised prices, and lower unit costs should lead to significant earnings growth. Our impression is that many investors are highly sceptical about the earnings growth story for Rio, and if growth is delivered in line with our expectations, Rio Tinto shares should perform well. This is one reason why Rio continues to be one of our top picks in the sector."

BC