Axiom Sees Rio Tinto's Dividend Policy As 'Unsustainable'; Cuts Price Target To $19

• Rio Tinto plc (ADR) (NYSE: RIO) shares have declined 36.43 percent year-to-date, dropping almost to their 52-week low on December 18, at $27.38.
• Axiom Capital Research’s Gordon L. Johnson II has maintained a Hold rating on the company, while lowering the price target from $24 to $19.
• Johnson believes the company is best positioned to cope with declining commodity prices, given its annual dividend of $2.27 per share and its debt of $1.5 billion due in 2016 and $1.8 billion in 2017.

Analyst Gordon Johnson recently noted that Rio Tinto's dividend policy is “increasingly expensive” and one that “even the lowest-cost producer is finding ever-more difficult to maintain.”

Although some market experts believe prices are at or near the bottom, Johnson believes that iron ore demand is yet to “crater,” given that China’s steel consumption is estimated to decline 2.9 percent year-on-year in 2016, displacing the iron ore demand of about 32Mmt.

Related Link: Research And Markets: Brazil Iron Ore Mining Market 2015-2020

In addition, China’s steel export channels appear to be drying up, while steel mill losses have been mounting due to the government’s commitment to SOE reform.

The ongoing CNY devaluation suggests that China is an option for a weaker currency rate to drive growth, in exchange for “structurally lower credit availability + deflation.”

Surplus Improvement Only Part Of The Picture

However, Johnson also noted that although the magnitude of the near-term iron ore surplus has improved since July 2015, oversupply is expected to widen from 40Mt in 2014 to 490Mt in 2019.

“Moreover, at today’s prices we believe idled mines around the world are just waiting for a rebound,” Johnson added.

The revenue and EPS estimates for 2015 have been lowered from $35.2 billion and $1.49 to $34.5 billion to $1.28, respectively, while the revenue and EPS estimates for 2016 have been lowered from $33.1 billion and $1.32 to $30.3 billion and $0.93, respectively.

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