oversold, so say HL19 Dec 2014 18:13
I know this a long article but thought I share. HL one of my brokers has a oversold on RIO shares, along with Royal Mail.
Komodo Dragons kill their prey by nipping them in the leg with poisonous fangs and then just follow along behind, waiting for the venom to do its worst. Thus they avoid a risky scrap, but still eat well. We wouldn’t be surprised if Glencore CEO, Ivan Glasenberg knows a thing or two about Komodo Dragons. Earlier this year Glencore approached Rio Tinto but were rebuffed. That was the bite. After a while, word got out and Rio Tinto had to announce they had spurned their suitor. Rio Tinto now has to either fight its way through the venom, or succumb. Shareholders know a premium was on offer, but not shown to them. Rio Tinto must deliver, or else, could be the fund managers’ way of thinking.
In common with other mining stocks Rio Tinto has been hit hard in recent weeks and the stock is now some 700p below its recent high.
Rio Tinto CEO Sam Walsh recently described the company as a cash machine. Major investments in new capacity are coming to fruition and as he sees it, sales could start to flood whilst capital expenditure falls. Over the last decade, Rio Tinto shares have, on average, been valued at the equivalent of 3.3 times turnover. Today, the ratio stands at 2.0.
The outlook for commodity prices is far from clear, but key commodities like iron ore and coal have already seen large falls. If Mr Walsh is right, Rio Tinto will have plenty of free cash flow to dispense to investors in the hope of mollifying them. But if he is wrong, he may well find that Mr Glasenberg is there, waiting at a safe distance.
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