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Why’s Rio Tinto Getting Under Analysts’ Skin?

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Oct. 17 2016, Updated 8:05 a.m. ET

Factors impacting Rio’s estimates

Analysts are concerned about Rio Tinto’s (RIO) (TRQ) overexposure to iron ore. It contributes ~70% of Rio’s EBITDA (earnings before interest, tax, depreciation, and amortization). Analysts’ long-term views on iron ore prices are still bearish. They expect prices to start correcting in 4Q16 and to remain weaker going forward as Vale’s (VALE) S11D project and Roy Hill hit the market in full force.

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Revenue projections

Analysts are projecting fiscal 2016 sales of $32.5 billion for Rio Tinto, which is a year-over-year decline of 8%. These estimates have seen an 6% downward revision since the start of 2016.

Sales for fiscal 2017 and fiscal 2018 imply a growth of 2.4% and 5.6%, respectively. This growth is mainly driven by expectations of higher volumes and a recovery in commodity prices.

Earnings estimates

Rio Tinto’s EBITDA projection is $11.4 billion for fiscal 2016. Analysts have changed their earnings projections several times this year. Estimates bottomed out at $9 billion in February 2016, and since then, consensus estimates have been steadily increasing.

The EBITDA margin for fiscal 2015 was 36.2%. Despite Rio Tinto’s cost-cutting efforts, analysts are projecting a lower margin of 35% for fiscal 2016 due to falling commodity prices. At 34.2%, the margin estimates for fiscal 2017 could still have more downside as commodity prices (COMT), especially iron ore, come under renewed pressure. This could also create pressure on other seaborne iron ore miners, such as BHP Billiton (BHP) and Vale (VALE).

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