Questor share tip: no concerns over Rio Tinto venture delay

Rio Tinto

£35.72½-49½p

Questor says BUY

Rio Tinto and BHP Billiton have requested a delay in the Australian approval of their iron ore joint venture in the Pilbara region of Western Australia. The shares dipped on the news, but Questor is not that surprised.

Steel makers in Asia have been making a lot of noise over the venture – arguing that a combination would lead to a monopoly supplier even though the two companies have agreed to market their ore separately.

Tom Albanese, Rio’s chief executive, has underscored the group’s commitment to getting the venture approved, because the $10bn (£6.4bn) or so of cost savings that would result are significant. However, it is taking a long time for the approval process to happen. There is definitely a question mark over whether this will go ahead, but Questor feels this is mostly priced into the shares because concerns about non-approval have been around for some time.

There was some positive news out of Australia this week after the country’s minority government said it will not increase the proposed 30pc resource tax or extend it beyond iron ore and coal mines to appease the Green Party and get it on-side in a coalition.

“We’ve got no intention of extending it to other commodities or increasing the tax rate. That would be inappropriate, because they clearly were not on the table at the election,” said Martin Ferguson, the country’s resources minister.

Rio plans to invest as much as $6bn this year on new mining projects and expansions and plans to raise that figure to $9bn in 2011.

The shares are trading on a December 2012 earnings multiple of 8.1 times, falling to just 7 in 2011. The yield is 1.7pc.

The shares have risen 6pc since May 4, when they were tipped as a buy at £33.79, compared with a market up 2pc. The shares are still a buy.