Rio Will Maintain Its Dividend, Canaccord's Hatch Predicts

• Shares of Rio Tinto plc (ADR) RIO have been trending down and have lost 47 percent since February 10, 2015.
• Canaccord Genuity’s Nick Hatch maintained a Buy rating for the company, while reducing the price target from 3,000p to 2,630p.
• Lower commodity price assumptions result in a price target cut, but the stock continues to be preferred in the diversified mining segment, Hatch stated.

Aggressive management actions, lower oil prices and weaker operating currencies versus the US dollar are expected to lower Rio Tinto’s operating costs, analyst Nick Hatch mentioned. Although the company issued a weaker-than-expected production report for 4Q, it guided to increased production from most commodities in 2015.

Rio Tinto is likely to report its 2015 underlying EBITDA at $12,862 million, versus consensus expectations of $12,857 million. A lower commodity price deck leads to a reduced underlying EBITDA estimate of $9,221 million for 2016.

Rating agency Standard & Poor’s has placed Rio Tinto’s A-/A2 credit rating on Negative credit watch, citing the company’s lower commodity cost assumptions. The agency expects the company’s funds from operations to debt to decline to 30-35 percent for 2016-2017, which is below the level for its current rating.

Hatch believes that despite management’s attempts to cut capital expenditure and other costs, the company’s FFO/debt ratio will fall below the 35 percent level.

Rio Tinto is expected to maintain its final dividend of 119c per share implying an increase in the company’s full year dividend to 226.5c per share. “The shares are yielding over 8% and Rio Tinto remains our preferred diversified mining share,” Hatch wrote.