Jefferies Downgrades Rio Tinto to Hold on CEO Change, Tariffs, Iron Ore Prices

Jefferies has lowered its rating for Rio Tinto (RIO.US) from "Buy" to "Hold," citing multiple adverse factors. The firm's analyst, Christopher LaFemina, highlighted several concerns that led to this decision. These include the upcoming change in the company's CEO, the recent increase in U.S. aluminum import tariffs, and the anticipated softening of iron ore prices.

LaFemina also expressed worries about the capital expenditures required for Rio Tinto's development in the lithium business. While the company has made strategic investments in the lithium industry, including the acquisition of Arcadium, these investments may not yield immediate returns. The analyst noted that if Rio Tinto's expectations for the lithium market are overly optimistic, it could lead to increased capital intensity and lower returns. This, in turn, would put pressure on the company's free cash flow, as the lithium business is unlikely to generate significant revenue in the short term.

Jefferies' team acknowledged that they are not bearish on the outlook for iron ore but believe that several factors will contribute to a near-term downward trend in iron ore prices. These factors include escalating trade tensions between the U.S. and China, continued weakness in major real estate markets, structural adjustments leading to the closure of steel production capacity, and seasonal demand reductions. The firm's long-term price forecast for iron ore is $90 per ton, with a slight risk of further decline.

Despite the downgrade, Jefferies does not view Rio Tinto as having "lost its investment value." Instead, the firm believes that the company's risk-reward profile has become more balanced given the current circumstances. In comparison to Rio Tinto and BHP, Jefferies expressed a preference for the investment prospects of Glencore, Anglo American, and Vale. This shift in rating reflects a cautious approach to Rio Tinto's near-term performance, as the company navigates through leadership changes, trade policies, and market pressures.