Technicals | Nov 03 2017
Bottom Line 02/11/17
Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support levels: $56.72 / $53.16 / $49.23
Resistance levels: $73.88 / $85.75 – $89.04
Rio Tinto ((RIO)) is involved in finding, mining and processing mineral resources. The Company’s products include aluminium, copper, diamonds and minerals, energy and iron ore. In January 2012, it acquired 2% of Ivanhoe Mines Ltd. In August 2012, Orocobre Ltd acquired Borax Argentina S.A. from Rio Tinto Ltd entities, Rio Tinto Minerals Development Limited and Borax Europe Limited. In September 2012, it sold the North American portion of its Alcan Cable business to General Cable Corporation. Recently Rio completed the sale of its 50.1% interest in the Clermont Joint Venture to GS Coal Pty Ltd. For the six months ending the 30th of June 2017 revenues increased 25% to $19.32B. Net income increased 93% to $3.31B. Revenues highlight the Iron Ore section increase of 38% to $8.76B and the China section increase of 27% to $8.33B. Broker consensus is currently “Buy”. The dividend yield is 3.0%.
Reasons to be more optimistic longer term (downside risk short-term):
→ Debt reduction, capex beats, more divestments, and productivity gains all positive.
→ A stronger interim dividend and extended buyback announced.
→ The US$2bn reduction in net debt was ahead of expectations.
→ Capital expenditure and strengthening the balance sheet are priorities.
→ Recently updated commodity prices bode well.
→ Aluminium and copper prices have been increased by most brokers and analysts.
The Materials sector, BHP and Rio shown here have been hovering around a strong zone of resistance over the past two or three months, unable to break through. Whilst many will see this as being reason for concern we certainly don’t. As long as price is posturing for a break higher there is always upside risk. Looking at this chart shows that the zone of resistance has been in place since 2011 meaning it is undoubtedly significant. In fact it’s been tagged on no fewer than five separate occasions since that time. Today was a strong session for the sector although strength needs to follow through before getting overly bullish. One thing we know from experience is that when the breakout finally materialises price usually trends very nicely which is exactly what we are looking for here.
Today was a much better session and if strength continues over the next few days then we can look at today's break above the prior pivot high as being a turning point. The banks have undoubtedly been the driving force off the 2009 lows but it could well be that it’s going to be the turn of the big miners to provide the next big opportunity. This is the ideal situation, though it’s dependent on seeing follow through. One thing we can’t afford to see is a rotation back beneath the recent pivot low at $56.72 as this would put paid to any thoughts of the breakout materialising any time soon. For now though, both eyes focused on the zone of resistance.
We have exposure to the sector via S32 & ASL which have suddenly burst into life over the past few days. However, if you like the looks of Rio then an opportunity is presenting itself. Buy following a push above today's high at $72.34, with the initial stop placed just beneath old resistance/new support at $70.00 which allows the trade some room to breathe. It also presents a low risk entry in a stock that has exceptional upside potential – assuming the breakout sticks.
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