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November 29, 2010
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For Immediate Release
Chicago, IL – November 29, 2010 – Zacks.com Analyst Blog features: AK Steel Holding Corporation (AKS), United States Steel Corporation (X), Rio Tinto Plc. (RIO), Aluminum Corporation of China Limited – Chinalco (ACH) and Ivanhoe Mines Ltd. (IVN).
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Here are highlights from Friday’s Analyst Blog:
AK Steel Downgraded to Underperform
According to Associated Press (AP), Standard & Poor's Ratings Services, a credit rating agency, has lowered its outlook on steel producer, AK Steel Holding Corporation (AKS) to "Negative" from its initial “Stable" outlook. Other ratings included a "BB" corporate credit rating that places AK Steel in non-investment grade status, two notches below the investment grade.
Last month, AK Steel reported third quarter 2010 results. The company posted net losses of $59.2 million or 54 cents per share for the third quarter of 2010 in contrast to a net income of $6.2 million or 6 cents in the year-ago quarter. Reported losses were higher than the Zacks Consensus Estimate of a loss of 34 cents. Higher raw material (iron-ore) prices and weak steel selling prices are eroding profits. Higher iron ore prices drove the third quarter operating losses by about $76 million or $52 per ton. The ongoing slowdown has marred prospects in the construction and housing sectors. Revenues and average selling prices are lower, as the U.S. and global markets are in a gradual recovery.
Iron ore pricing concerns have led to a negative outlook for steel manufacturers. Iron ore 2010 benchmark price is an increase of 98.65% over the 2009 benchmark, and is higher than a 65% increase that AK Steel had forecast for the first half and the third quarter of 2010. AK Steel pays nearly double for iron ore pellets compared with its integrated competitors, including United States Steel Corporation (X), who own their own pellets. AK Steel is also facing weak steel demand. The company is unable to pass on the rising raw material cost to customers through price hikes. Such factors should weigh on the company’s profitability in the near term. The ratings agency believes that the company will post weaker results in the next few quarters.
AK Steel foresees a challenging fourth quarter on lower shipments and prices along with higher costs. The company is expecting an 8% to 10% sequential decline in shipments to 1.3 million tons to 1.35 million tons due to higher inventories in the consumer markets and approximately 4% decline in the average selling prices resulting from lower spot market pricing and changes in product mix. Particularly carbon steel products prices are likely to remain under pressure. The company expects to incur operating loss of about $80 per ton in the fourth quarter.
The weak third quarter results coupled with a weaker fourth quarter guidance have lead to a significant downtrend in the Zacks Consensus Estimate for the current quarter and full year 2010.
We are downgrading AK Steel to Underperform from our previous Neutral recommendation and lower our target price to $12.00 from $15.00.
Rio Tinto’s Investment Plans
Rio Tinto Plc. (RIO) has decided to invest C$10 million (approximately US$10.1 million) for five years to build a Rio Tinto Centre for Underground Mine Construction. The new centre would improve construction activities in underground mines and help maximize output.
Rio Tinto is also on an investment spree to enhance production based on the gradual market recovery. Recently, Rio Tinto announced plans to invest $2.1 billion for further development of its Pilbara iron-ore mine and $140 million in addition to $347 million to increase production of billets at its plant in Straumsvik, Iceland.
Rio Tinto has queued up a massive investment plan, including $800 million for completion of the underground block cave project at the Argyle Diamond Mine located in Australia, $1.6 billion investment for development of the Hope Downs 4 iron ore project,expected to be operational by 2013 with an annual capacity of 15 million tons, a $563 million MoU with Aluminum Corporation of China Limited – Chinalco (NYSE: ACH) for the development and operation of the Simandou iron ore project in Guinea, etc.
After acquiring a 22.3% stake in Ivanhoe Mines Ltd. (IVN) in June 2010, Rio Tinto in September acquired an additional 5.3% stake by exercising its warrants.
Increased investment plans will decrease cash in hand, but investment in various growth projects will enable Rio Tinto to feed the long-term demand for its commodities.
With its long-life, low-cost assets, and a strong pipeline of attractive growth projects, Rio Tinto has assets that can generate positive cash flow under difficult market conditions. Though commodity demand from China and other emerging economies has slowed in the last couple of months, management is confident that industrialization and urbanization will continue in these markets, thereby strengthening the demand for Rio’s products.
China is expected to grow by 9% in 2010. Chinese steel consumption is expected to increase 6.7% to 579 million tons in 2010. China is expected to remain the largest consumer of metals in the years to come. Hence, the medium-term outlook for metal commodities remains encouraging.
Management expects the global demand for its key products such as iron ore, copper and aluminum to double by 2022, primarily driven by China, India and the emerging markets bloc. Rio Tinto’s investment in various growth projects will enable it to capitalize on long-term demand.
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