Credit Suisse prefers Rio Tinto over Brazilian rival Vale

9th Jun 2014 09:13

Credit Suisse has maintained its 'outperform' rating for diversified mining group Rio Tinto, saying it prefers the UK-listed stock over Brazilian rival Vale."After plotting the iron ore heavyweights against each other on various factors, we note that the mere fact that Rio Tinto is exiting its capex-intensive iron ore growth phase just when Vale is about to commit capital to increase sales volumes by ~10% until 2015 (vs RIO's increase of ~34% on the same period) gives rise to significantly different free cash flow (FCF) outlooks and valuation metrics," the bank said in a research report.Despite Rio trading at a 30% premium to Vale on a forward price-to-earnings ratio basis, the stocks' two-year forward enterprise value-to-earnings before interest, tax, depreciation and amortisation (EBITDA) multiples have converged.However, Credit Suisse believes that the market is "correctly anticipating" a return to positive FCF and shareholder returns at Rio Tinto, while Vale embarks on a capex-intensive period to increase volumes."Although we think this is likely to be delivered, it remains subject to a level of uncertainty given the natural ramp-up risks of mining expansions. Additional structural differences include Brazil mining legislation uncertainty and corporate taxes compared to clearer if imperfect Australian legislation," it said.The bank sees the potential for Rio to outperform value by at least 20%.It has kept a 4,200p target price for Rio, which was trading 0.5% higher at 3,185.4p by 09:45 on Monday.BC