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Behind the Iron Ore Pullback—And the Analysts' Reactions

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Part 5
Behind the Iron Ore Pullback—And the Analysts' Reactions PART 5 OF 10

What RBC Believes about Rio Tinto

Analysts’ ratings of Rio Tinto

Out of the 15 Wall Street analysts covering Rio Tinto (RIO), 73% gave it a “buy” recommendation, while 7% gave it a “hold” recommendation, and 20% gave it a “sell” recommendation. By comparison, BHP Billiton (BHP) and Vale (VALE) have each received “buy” recommendations from 47% and 32% of the analysts, respectively.

What RBC Believes about Rio Tinto

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Cliffs Natural Resources (CLF), which is primarily exposed to the US (DIA) domestic steel market, has “buy” recommendations from 22% of the analysts covering its stock.

Analysts’ opinions

RBC believes that Rio is at its cheapest in five years. This has led RBC to upgrade Rio from “outperform” to its “top pick” on May 17, 2017. As reported by the Financial Post, RBC stated: “We believe the market is taking too negative a view on the medium-term iron ore market, and this is obscuring a growing, low cost, high free-cash-flow story.”

RBC has noted that at current prices, iron ore, aluminum, and coking coal are below consensus levels for 2018, stating: “This leaves Rio Tinto with the highest potential for mark-to-market upgrades amongst the London diversifieds.”

Axiom analyst Gordon Johnson, however, believes that iron ore stocks are attractive shorts. Johnson’s view is mainly based on the combined impact of weakening Chinese steel demand outlook and increasing iron ore inventories, and so he suggests shorting Fortescue Metals (FSUGY), Cliffs Natural Resources (CLF), Rio Tinto (RIO), and U.S. Steel (X).

On April 20, 2017, Citigroup (C) upgraded Rio from “neutral” to “buy.” According to Citi analyst Heath Jansen, this upgrade is mainly due to the share price correction, given the current weakness in iron ore prices.

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