Shares of resources giant Rio Tinto plc (LON:RIO) jumped 4.4% in early-trading, joining it higher were Antofagasta plc (LON:ANTO), up 3.0%, and Vedanta Resources plc (LON:VED) with shares tracking 2.2% higher. The biggest risers in early-trading this Wednesday helped FTSE-100 march 1.3% higher within a few hours into the trading session.
All three companies are up more than 50% for the year, while Vedanta staged an impressive 230% rally. After hitting multi-year lows at the start of 2016, the sustained recovery in bulk-commodities, including iron-ore, coal and coke, has rekindled investors’ interest in the embattled resources sector.
Signs of recovery
This Wednesday, the benchmark index in China, Shanghai Composite, was up more than 0.5% after three consecutive down-days as the market awaits substantial cash inflow from several investment funds selected by the Chinese government to pursue its pension fund asset allocation.
Apart from the consumer sector, another sector leading the rally was materials. After China came up with fourth-consecutive expansionary reading in manufacturing PMI earlier this month, positive data from the US manufacturing sector as new orders for factory goods recorded an 18-month high can be seen as the key catalyst behind today’s rally.
On the oil front, although there is no clarity on the impact of OPEC’s production cut impact until the key non-OPEC producers such as Russia come into the fold, there is a positive sentiment that oil producers are finally coming together to fight the supply glut.
The leader says
On Dec. 6, RIO said in its investing seminar that “China’s demand for commodities will continue”. However, the company expects the industry growth to be slower in-line with the country’s “industralisation and urbanisation”. Over the long term, RIO indicated a positive outlook for the mining sector with increasing demand in India, Africa and the ASEAN countries.
RIO said, given the uncertainty in the short-term, its focus will remain on developing high quality assets and improving its balance sheet. As per RIO, it’s well on track to deliver $2 billion in cash cost savings by the end of 2017 and with increased productivity over its $50 billion asset base, the company expects to generate $5 billion additional free-cash-flow over the next five years.
While RIO’s balance sheet appears to be in a fine-shape with operating cash flows to the overall debt debt ratio of over 20%, the same can’t be said about Vedanta Resources and Antofagasta, which don’t appear as resilient as the former in case the mining industry faces another downturn. Here’s how their financial health comparison looks like.
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