Rio shares struggle to regain lustre despite cheaper yuan

China’s shock yuan devaluation is reverberating far and wide, and global mining companies are predictably among the equity sectors feeling the biggest impact.

However trading has been volatile.

 

 

The FTSE 350 Mining Index traded 2.3% lower after the People’s Bank of China lowered the renminbi’s daily fix to the US dollar by 1.9 per cent to 6.2298.

Base metal spot prices, having seen a relative recovery in recent days from their cyclical downturn over the last few years, slipped.

In turn, shares of giant FTSE 100-listed miners dropped hard, rose moderately into the black, before resuming their decline as traders tried to decide how to react.

The main issue was how much weight to give the notion that China’s move was pre-emptive—to offset deeper than foreseen economic weakness—and how much the devaluation could boost demand for industrial metals in the country which is their biggest consumer.

On Tuesday, investors largely took the move as having more bearish implications than the converse.

 

 

Shares of Rio Tinto, Antofagasta, Anglo American and BHP Billiton traded at the bottom of the UK benchmark by mid-afternoon, losing between 2% and as much as 3.3%, in the case of the biggest loser, Glencore.

Shares of base metals producers contrasted sharply with those of precious metals miners, which topped the FTSE.

Fresnillo was 3.2% higher, whilst Randgold Resources gained 2.5%.

The non-ferrous producers have an obvious read-across benefit whilst gold resumes, perhaps temporarily, its safe-haven characteristics.

Gold continues to rally after bouncing late last week at $1,080 per oz., a level that has consistently provided support since late July.

 

Spot gold, daily chart 

Please click image to enlarge

 

 

 

Whilst, we think prospects for the precious metal’s price remain bearish in the short to medium term given the fundamental drivers underlying gold, a current upside limit that may be as far away as $1,1042 may in turn bolster gold-related stocks.

As for the largest UK-listed base metals miners, Rio Tinto’s aggressive campaign to remain the world’s lowest-cost iron ore producer implies a unique lustre for its shares.

 

But it’s more complicated than that, obviously.

 

Rio’s production of iron ore at or below $30 per tonne in Australia, the cheapest production costs in the world, is doing enough damage to the cost curve to remove a steady stream of smaller, less competitive miners from operation.

That’s making it easier and easier for Rio, and its closest rivals—e.g.—Vale SA, to do business every quarter.

Even so, Rio still doesn’t have a great deal of time on its side.

It reported a 43% loss in first-half underlying earnings last week.

At the same time, production rose 12%.

The increasingly cheaper price of its key commodity is also still going in the wrong direction; sitting on the better part of a 50% fall year-on-year.

But not all higher-cost producers are inclined to follow logic.

Some can find cash elsewhere to subsidise production while waiting for higher prices.

Plus, mining in some regions is more closely intertwined with government than in The West.

Elsewhere, social costs—e.g. jobs—are often just as big a consideration as financial ones.

So Rio still faces a long slog.

From a shorter term technical perspective, Rio’s shares also look to be at the limit of their up leg from mid-July lows during which they rose 11%.

 

Rio Tinto daily chart

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Having visited its 50-day moving average (MA) the price is resting on the weak 23.6% retracement of its rise from approximate five-year lows on 27th July.

10% slippage, of the kind seen during its most recent consolidation from mid-July, lopped 10% off the stock, suggesting the current consolidation will return RIO back near to the 2373p price it last saw late last month, and previously, on 8th September 2009.

If this emerging support level remains intact in the weeks ahead, shares of the second-largest supplier of iron ore may begin to reflect increased chances of supported demand in China.

There’s also a chance an important retracement interval, 61.8% of the up move from July lows, could support the stock, especially given that the level roughly coheres with previous resistance.