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Why Margin Projections for Rio Tinto Have Seen a Boost

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Factors affecting Rio’s estimates

Analysts are concerned about Rio Tinto’s (RIO) (TRQ) overexposure to iron ore. The commodity contributes ~70% of Rio’s EBITDA (earnings before interest, tax, depreciation, and amortization).

Analysts’ long-term views on iron ore’s price are still bearish. They expect prices to start correcting from 2017 onward as a wave of new supply from Vale’s (VALE) S11D project and Roy Hill hit the market in full force.

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Revenue projections

Analysts are projecting 2016 sales of $33.4 billion for Rio Tinto, which would reflect a year-over-year fall of 5%. Sales estimates for 2017 and 2018 imply rises of 2.4% and -2.4%, respectively. 

These projections have likely been driven by expectations of higher volumes and firmer iron ore prices in 2017. Analysts still expect iron ore prices to taper off in two years, which could explain the expected negative growth in 2018.

Earnings estimates

Rio Tinto’s EBITDA projection is $11.9 billion for 2016. Analysts have changed their earnings projections several times this year. Estimates bottomed out at $9 billion in February 2016, and since then, they’ve been steadily rising.

Rio’s EBITDA margin was 36.2% in 2015. Despite the company’s cost-cutting efforts, analysts expect a lower margin of 35.6% for 2016 due to the weaker commodity prices that prevailed for part of the year. 

For 2017, however, margin projections have risen significantly given the brighter outlook for industrial commodities following China’s resilience and Donald Trump’s win. The margin for 2017 is expected to be 38.1%. 

However, commodity prices (COMT), especially iron ore prices, could see renewed pressures after new supply comes online. This development could put pressure on other seaborne iron ore miners such as BHP Billiton (BHP) and Vale (VALE).

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