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(B)(N) RIO Rio Tinto PLC ADS

June 3, 2013

Deal Book. Rio Tinto’s 59% share of Iron Ore Canada (IOC) is on the block for $4 billion and going begging (Reuters, June 3, 2013, Rio draws up shortlist for Canada iron ore sale: sources). IOC has been in continuous production since 1954 and is one of the world’s largest producers of iron ore pellets; the company has 2,500 employees and operates the mine, a concentrator and pelletizing plant in Labrador City, Newfoundland & Labrador, and a rail-line to its deep-water port in Sept-Îles, Quebec (please see the map and mine below).

Iron Ore Canada

Iron Ore Canada

IOC is privately owned with two other partners, cash & carry, and good for patient money looking for an income from producing properties with a well-known economics and a hopeful capital gain net of the cleanup expenses.

However, Rio Tinto lost $3 billion on sales of $50 billion last year, and some of its diamond and aluminium producing properties are also up for sale at “poor boy” prices (please apply at the office).

Iron Ore Company of Canada loading and haulage equipment. (Handout)

We last owned Rio at $70 in 2011 (please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason) and it’s currently trading at $43 and well-below the current Risk Price (SF) of $60.

The company expects to pay a dividend of $3.4 billion to its shareholders this year for a current yield of 4.3% but we can’t buy it because there’s no evidence of “price support” for the stock price, absent the dividend yield.

Our estimate of the downside due to price volatility in the next three months is minus (-$5) per share and we would not be surprised by any price between the current $43 and $38 to $48 which is still well-below the current Risk Price (SF) of $60 and declining.

The July put at $40 is selling for $0.70 per share today and the cost of that can be offset by a sold or short call at $48 for $0.80 so that for a cost of holding the stock at $43 and a gain on the collar at $0.10 per share ($0.70 less $0.80), we could expect to hold the stock for between $40 and $48 and collect dividends $0.46 per share for the next month or so. But, what’s to say that we won’t be sold out at $40?

Stock prices at or above the “price of risk” are provably “as good as cash” and “better than money” and anything else is just a gamble. Please see the references below.

Exhibit 1: (B)(N) RIO Rio Tinto PLC ADS – Risk Price Chart

(B)(N) RIO Rio Tinto PLC ADS

(B)(N) RIO Rio Tinto PLC ADS

Rio Tinto PLC is an international mining group that engaged on finding, mining and processing the Earth’s mineral resources. Its main products are Bauxite, Alumina, Copper, Gold, Molybdenum, Silver, Nickel, Diamonds and Rutile.

(Please Click on the Chart to make it larger if required.)

From the Company: Rio Tinto PLC engages in finding, mining, and processing mineral resources worldwide. The company is involved in the mining and production of aluminum products, including bauxite, alumina, and aluminum; copper, gold, silver, and molybdenum; diamonds, borates, salt, and titanium dioxide feedstocks, as well as purity iron, metal powders, zircon, and rutile; thermal and coking coal, and uranium; and iron ore. It primarily operates in China, Japan, other countries in Asia, the United States, the United Kingdom, Europe, Canada, and Australia. Rio Tinto plc was founded in 1873, has 72,000 employees, and is headquartered in London, the United Kingdom.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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