Rio Tinto to Decline on Fall in Iron Ore Prices

Rio Tinto to Decline on Fall in Iron Ore Prices
November 22, 2016

The stock of Anglo-Australian mining company Rio Tinto Plc (NYSE: RIO) hit a 12-month high of $40.19 on November 10th, which would also be the likely expiry date for the call option trade suggested on October 11th. We had asked the binary trader to pick up a strike price of about $36. Now, as it can be understood, the stock has appreciated more than 10% above our target price. So, in anticipation of another trading opportunity, we studied the latest developments relevant to the company. Based on the details collected and presented below, we forecast a short-term correction in the stock.

Last week, Rio Tinto announced that it has terminated Alan Davies – the Chief Executive for Energy and minerals, and Debra Valentine – the executive for legal and regulatory affairs, in connection with payments of up to $10.5 million made to a consultant for the sanction of an iron-ore mining contract in Guinea. An internal probe into the emails dated back to 2011 revealed that the consultant was close to the senior government officials of Guinea and the amount was paid to lobby for the mining rights in the Simandou region.

The probe will not affect the company financially. However, the sentiment would turn bearish in the short-term. It can be remembered that Rio Tinto took an impairment charge of $1.12 billion earlier this year considering the difficulty in getting the needed funds for the Simandou project.

After rallying to a two year high of $79.80 ten days back, the price of iron ore plunged sharply to about $70 per ton. The fundamentals suggest further declines in the price of iron ore. There are two principal drivers behind the rise in the price of iron ore. The first major factor is the restructuring of steel mills currently carried out in China. In this regard, the Chinese government’s policies encouraged import of iron ore than domestic procurement. This led to an artificial demand and an increase in the prices. The second factor is the minor supply disruptions in Australia. The second factor is no longer valid now. Unless new supply disruptions arise, the iron ore supply would continue to increase at a rapid pace and add up to the glut which is expected to last for as long as ten years. So, considering these facts, we anticipate the price of iron ore to decline steadily in the near future.

The historic price chart shows an evening star candle formation. This reflects the underlying weakness in the stock. The stochastic oscillator has also started declining after hitting a high of 100. Thus, we can anticipate the stock to undergo a price correction in the days ahead.

Rio Tinto - Technical Analysis - 22nd November 2016

A trader can purchase a one touch put option to benefit from the stock’s decline. To minimise the risk in the trade, a strike price of about $35 should be chosen. It would also be beneficial to the trader if the put option remains valid until the 15th of December.


Andrew Wright

Prior to founding in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.

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