Rio Tinto Plc (NYSE: RIO) one of the largest integrated mining companies in the world has been feeling the pain of declining commodity prices in recent years. After hitting a pre-crisis high above $90 in 2008, the stock fell as low as $10 in one year. After the financial crisis, Rio managed to get back to $60 in 2011 but since then it has been falling together with commodity prices.
As of today the shares of the company, on the NYSE, fell close to 70% from their 2011 levels. With improving fundamentals and deeply oversold technicals, the firm provides a good opportunity to play a bounce in commodities and to invest in long-term growth in the sector.
The British-Australian mining giant is well prepared to face tough times and is likely to emerge stronger from the current cycle. With low debt levels and an active management, Rio will be able to buy mining assets from distressed companies at a bargain to ensure growth for the future. The firm produces most of its metals and minerals at a very low cost, thanks to its size and efficiency, meaning that it is able to stay profitable much longer than the competition. On the negative side, the company is exposed to the, now troubled, Chinese economy, but also has interests in other parts of Asia that are likely to increase consumption of iron ore, copper, and aluminum, the most prominent products of Rio.
The technical picture shows excessive bearish movements in recent trading. In little more than two weeks this year, the stock declined 30% and is down almost 50% since mid-October. The MACD momentum indicator signals deeply oversold conditions and a pronounced bullish momentum divergence. A rally to the 50-day MA, currently 30% higher than the price, is likely in the coming weeks even if the downtrend continues. Long-term support is at $20 and $17.5 while the closest resistance zone is found around $27.5 with the $30 level providing further overhead supply.
Call options on Rio with one or two months to expiry look promising with 20-30% of upside possible eve in the short-term. The $25 level is probably optimal for a strike price with great potential if the bounce in commodities materializes.
Until commodity prices don’t bottom out, long-dated options are not recommended, but the current oversold condition means that a speculative play expiry in May and June could be highly profitable too.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
