Rio Tinto Share Price

BHP, Rio among miners who don't return enough cash, says top investor

The comments by Evy Hambro, manager of BlackRock's $US35 billion natural resources funds, signal a growing impatience in the market at the underperformance of mining company shares relative to other sectors, and concern that miners could be tempted into a value-destructive deal as a way to lower their cash pile.

"The excess prices they are getting are clearly surplus to their requirements," he said in a recent interview with Dow Jones Newswires. "They don't need all that additional money and the windfall that they're getting from today's markets should be shared with investors."

BHP Billiton, the world's biggest miner by market capitalisation, last week completed a $US10 billion share buy-back, prompting analysts to speculate that more returns on the same scale are likely to be announced in annual results due next month.

Vale, the world's second-biggest miner by market value, announced a separate $3 billion program last week.

A BHP spokeswoman declined to comment on the speculation.

Paul Galloway, a mining analyst at Sanford Bernstein in London who advises several other major mining funds, argues that companies still owe a debt to investors who bailed them out during the financial crisis.

"Shareholders put their hands in their pockets to refinance balance sheets. Managements believe they've been paid back by a rising share price but I'm not sure investors see it that way," said Mr Galloway.

Prices of the heavy commodities that account for the majority of major miners' profits at present are at near-record levels. Front-month TSI iron-ore futures on the Comex exchange were quoted at $US170.19 a tonne yesterday, 10 per cent below their all-time peak in February but well above historic levels. Newcastle thermal coal, the Asian benchmark product, was quoted at $US121.85t on the Intercontinental Exchange, around twice its typical level before late 2007, while recent steelmaking coal settlements are up around 50 per cent on the year at around $315t.

In their most recent results for the year ending December 2010, Vale reported $US17.3bn and Rio Tinto $US14bn in net profits, while Xstrata and Anglo American reported earnings of $US5.2bn and $US5bn, respectively. BHP, whose financial year ended last Friday, reported $U$10.5bn profits in its first half alone.

But investors are sceptical about miners' ability to invest their profits wisely, accounting for much of the relative underperformance seen by the sector in recent months, Mr Hambro argued.

Broker Roundup: Lloyds Bank, Rio Tinto, Aquarius Platinum, Lonmin ...

Broker Spotlight brings some of the more intriguing and topical analyst coverage to centre-stage. The daily column aims to illuminate thoughts and opinions behind the big stories. London is one of the financial capitals of world. The influential and closely followed views of its analysts regularly move markets and split opinion. The Broker Spotlight column arms Proactive readers with the added insight from the often colourful thoughts and headline-grabbing valuations from the City’s analyst community. “We believe two-thirds of KCOM’s value is held within its highly cash generative Hull incumbency,” it said. “While fixed-line telecoms has proved defensive and we don’t foresee any material downswing to KC’s performance, we are mindful that Hull’s challenging economy may limit KC’s ability to put through price increases of a similar scale to those seen in the rest of UK fixed-line.” Rio Tinto ( LON:RIO ) remains one of broker JP Morgan’s top picks among large diversified companies despite the company having suffered an ‘aggressive de-rating’ of its shares since its giant £9.5 billion rights issue in 2009. Analysts at JP Morgan calculate that Rio has lost roughly three price/earnings points since the rights issue compared to the three years previously, leaving it trading on a multiple of 7 versus 10 before. This morning analysts at the Swiss broker cut their price targets for both stocks, slashing the AQP target from £19.00 to £16.90 and dropping the LMI target from 400 to 380p. Of the two stocks the analysts said they prefer Aquarius, which they rate as ‘neutral’, rather than Lonmin, which they give an ‘underperform’ rating. In a note Collins Stewart said: "With a stable base of profitable operating assets, Ferrexpo is the only established primary iron ore producer in London. Fully funded for the next phase of growth, we see Ferrexpo as a relatively low risk way to gain exposure to the iron ore price." Meanwhile Charles Kernot, at Evolution Securities reiterated his "buy" recommendation for the stock targeting a price of 520 pence (current share price: 481.30 pence). In a note on Sunrise Resources ( LON:SRES ) Northland Capital’s Andrew McGeary said: “With the shares heavily correlated to the Long Lake gold project we perceive the Derryginagh as potentially free upside potential.

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