Collected Wisdom

This week we look at Rio Tinto, Qantas, Santos, Newcrest Mining, and Ramsay Health Care.

Summary: The newsletters point to capital expenditure cuts and higher dividends as positives for miner Rio Tinto, and are also impressed with the growth pipeline at oil and gas group Santos. But airline Qantas raises concerns, as does goldminer Newcrest. Hospital group Ramsay is seen to be in good shape, having outperformed the market.
Key take-out: The investment press like the efforts underway at Rio Tinto to cut operational costs, and also are attracted to the prospect of higher dividends from the miner. However, some concerns remain over its high exposure to iron ore.
Key beneficiaries: General investors. Category: Shares.

This is an edited summary of the Australian investment press: It includes investment newsletters, major daily newspapers and broker reports. The recommendations offered represent the views published in the other publications and may not represent those of Eureka Report. This article is general advice only which has been prepared without taking into account your objectives, financial situation or needs. Before acting on it you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Rio Tinto (RIO)

Mining giant Rio Tinto impressed newsletters by announcing two big cost-cutting measures during its investor day in Sydney this month.

The company expects to save more than $US3 billion in the expansion of its operations in the Pilbara as the iron ore mine ramps up to produce 350 million tonnes by 2017. Rio said it will save another $450 million in the shutdown of the loss-making Gove aluminium refinery and other non-core aluminium assets.

Rio also said it is on track to reduce operating cash costs by $US2 billion in 2013 and that capital expenditure will come down to around $11 billion next year.

Newsletters take these developments as another sign chief executive Sam Walsh is delivering on his promises to cut capital expenditure, strip out operating costs and boost the balance sheet. Overwhelmingly, newsletters say the stock will outperform the wider market in the next 12 months, as does Eureka Report’s Tim Treadgold in A rethink on Rio.

What’s particularly attractive to the investment press are higher dividends and the prospect for special dividends and buybacks by 2015 as Rio frees up cash; consensus estimates are for net debt to fall by around 30% to $14.8 billion in the next two years.

Analysts on average anticipate Rio’s dividend yield to lift to 3.4% in 2015 from its current 2.8%.

However, one source notes that Rio’s business diversification is being sacrificed as the company closes and sells off assets outside iron ore, making Rio highly dependent on the iron ore price (see Adam Carr’s Iron story is ore inspiring).

The miner’s share price also appears close to full value, having climbed 30.9% to $65.77 since June lows.

* According to our value investor partners, StocksInValue, the intrinsic value for Rio Tinto is $60.50. To find out more visit

  • Investors are generally advised to buy Rio Tinto at current levels.

Qantas (QAN)

The majority of the investment press have clung on to Qantas despite the national carrier nosediving after warning the market it expects an underlying loss between $250 million and $300 million for the first half of 2013-14.

The result would mark Qantas’s first ever loss in the six months to December 31, and puts the airline on track to make an underlying loss of $600 million for 2013-14 when analysts were anticipating a small profit.

Shares in Qantas slumped 11.2% to $1.07 – their biggest fall in 18 months – following the group’s announcement, which also included the slashing 1,000 jobs, freezing executive pay and cutting costs by $2 billion.

The stock fell another 3.7% the following day after Standard & Poor’s downgraded Qantas’s credit rating to ‘junk’ status, citing the acceleration of structural issues for the airline.

When factoring in the share price slide (the company closed at 99 cents today), most newsletters say the stock is a hold. They say the war for domestic capacity with Virgin will continue to take its toll on Qantas’s earnings as the company strives to maintain its 65% market share, but at current share price levels, the stock is around fair value.

Eureka Report’s John Abernethy disagrees. He recently gave an underweight recommendation on the stock. Indeed, many newsletters have attached a “very high uncertainty” rating to their hold recommendation, reflecting the company’s poor earnings visibility. Any hope for Qantas to lift earnings relies on a more rational competitive environment in the domestic market, one source says, but when this might happen is not known.

Support from the federal government is also unlikely, given Federal Treasurer Joe Hockey said “governments should not be in the business of propping up private-sector operations”.

* According to our value investor partners, StocksInValue, the intrinsic value for Qantas is $0.49. To find out more visit

  • Investors are generally advised to hold Qantas at current levels.

Santos (STO)

Australia’s second-biggest oil and gas producer, Santos, is forecasting output to reach up to 57 million barrels of oil equivalent (mmboe) in 2014 and more than 70 mmboe as its new projects ramp up production. This compares with the 51 mmboe expected for 2013.

At an investor briefing, Santos said two of the big LNG projects it has a sizeable stake in are mostly finished. PNG LNG is more than 90% complete and is scheduled to begin producing in the second half of 2014, while Gladstone, in Queensland, is more than 72% finished with production on track to begin in 2015.

The two other projects coming online, Peluang in Indonesia and Dua in Vietnam, will also help boost output in 2014, the company said.

The investment press are pleased that the projects will most likely be delivered on budget and on time, given most of the massive infrastructure for them has now been built.

Similarly to Rio Tinto, the newsletters are drawn to Santos’s prospects for capital management in the next few years. Peak capital expenditure is behind the company, and its operating cash flows are predicted to double in the next few years.

This will give Santos ample opportunity to dish out the $993 million in franking credits it has stockpiled, either through special dividends or buy-backs.

Analysts on average anticipate the oil and gas producer’s dividend yield to jump to 3.4% in 2015 from this year’s estimated 2.2% and have a one-year target price of $15.82 on the stock – 35% above its current price.

* According to our value investor partners, StocksInValue, the intrinsic value for Santos is $4.38. To find out more visit

  • Investors are generally advised to buy Santos at current levels.

Newcrest Mining (NCM)

The fall in the gold price has generated mixed reactions from the investment press over Newcrest, to the extent that one source upgraded their recommendation while another issued a downgrade.

The gold spot price fell 2.7% to $US1,220 an ounce last week as analysts questioned its validity as an investment in the current economic environment (see Gold in the cold). If it falls through the $US1,200 support barrier, there are fears it could plummet to $US1,000 in the next 12 months.

If gold were to fall that far, Newcrest could be in serious trouble, newsletters say, given the gold miner’s cash operating costs are more than $US1,000 an ounce and it is geared at over 40%.

Newcrest is in the process of slashing costs across the business, with an unknown number of jobs being cut at its flagship Telfer mine, but one source says it’s still bleeding cash and needs to do reduce costs more and sell off assets.

However, another source believes the market has been too aggressive in selling off the company over the gold price and over the possibility of a capital raising. In the past six months Newcrest has fallen 41.2% to a decade low of $7.08, with the recent gold price scare contributing 9%. The source acknowledges that gearing is stretched, but thinks Newcrest has the liquidity to get through the current gold price environment without going to the market.

On the whole, newsletters are deeply split on Newcrest, but more say the stock is a sell due the bleak prospects for the gold price.

* According to our value investor partners, StocksInValue, the intrinsic value for Newcrest Mining is $3.95. To find out more visit

  • Investors are generally advised to sell Newcrest Mining at current levels.

Ramsay Health Care (RHC)

Ramsay Health Care’s €149.4 million ($A224.1 million) acquisition of French psychiatric hospital group Medipsy is a good decision by the private hospital operator, most newsletters say.

Ramsay’s French subsidiary, Ramsay Santé, has signed a contract to buy all of Medipsy’s shares and assume its financial debt and leases of €2.5 million. The move, which is funded from cash and debt, vastly expands Ramsay’s exposure to France; the acquisition quadruples the number of facilities Ramsay operates in the country to 40.

As well as playing into Ramsay’s global growth ambitions across Australia, the UK, France and Asia, newsletters say the move fits well into the company’s business strategy. Owning Medipsy plays into Ramsay’s strengths in managing psychiatric hospitals and boosting margins from underperforming assets, one source says.

While the details of the acquisition were bare, analysts think it will be modestly incremental to earnings in the short to medium term.

This is largely already reflected in Ramsay’s share price and, as such, the majority of newsletters say the stock is a hold. Most rate the current share price of $39.31 at slightly above fair value, with a 12-month consensus target price of $37.87.

John Abernethy, who wrote about the stock back on October 2, rates the stock as “underperform”.

Ramsay, which is tipped to produce double-digit earnings growth in the next few years, has run up more than 50% in the year to date, outperforming the S&P/ASX 200 Index by around 37%. Its one-year forward price-earnings multiple is at 23.4 times, in line with its five-year average.

* According to our value investor partners, StocksInValue, the intrinsic value for Ramsay Health Care is $21.53. To find out more visit

  • Investors are generally advised to hold Ramsay Health Care at current levels.

Watching the Directors

  • Fortescue Metals chairman Andrew Forrest continued to buy up stock in the iron ore miner this week, purchasing 140,898 shares for $778,504 after splashing out nearly $11 million on the company’s stock three weeks ago.
  • Meanwhile, Seven Group Holdings director Richard Uechtritz, who used to be chief executive of JB Hi-Fi, snapped up 30,000 shares in the media group for $216,600.
  • Elsewhere, Hunter Hall International chief executive David Deverall sold 35,000 shares in the investment management company for $71,710. Deverall was formerly the chief executive at Perpetual, another wealth management firm.

Takeover Action December 5-11, 2013

10/12/2013Ampella MiningAMXCentamin18.88
06/12/2013Argosy MineralsAGYBaru Resources88.64
10/12/2013Blackwood CorporationBWDCockatoo Coal5.23
05/12/2013Carabella ResourcesCLRChina Kingho Energy Group11.06
06/12/2013Central Australian PhosphateCENRum Jungle Resources93.11Compulsory acquisition
01/11/2013CoalbankCBQLoyal Strategic Investment62.2775% proportional offer
03/12/2013Commonwealth Property OfficeCPAGPT Management7.97
25/11/2013Continuation InvestmentsCOTDMX Corporation0.00
26/11/2013Elemental MineralsELMDingyi Group Investment31.61Ext to Jan 31
22/11/2013Emerald Oil & GasEMRConfederate Capital Pty Ltd25.7330% proportional offer. Closes Nov 30. Unconditional
06/11/2013Energia MineralsEMXCauldron Energy0.00Closing Feb 6
28/08/2013EnvestraENVAPA Group33.00
06/12/2013e-pay AsiaEPYGHL Systems72.24
09/12/2013Glory ResourcesGLYEldorado Gold39.14
05/12/2013Jacka ResourcesJKATangiers Petroleum0.00
28/11/2013Keybridge CapitalKBCOceania Capital Partners20.77
06/12/2013Kuth EnergyKENGeodynamics89.37
21/10/2013Marathon ResourcesMTNBentley Capital19.98
05/12/2013PaperlinX SPSPXUPaperlinX0.00Offer for all step-up preference securities
13/11/2013Scott CorporationSCCK & S Corporation0.0075% minimum
10/12/2013Tranzact Financial ServicesTFSGro-Aust68.14
11/12/2013Warrnambool Cheese & ButterWCBBega Cheese18.00ACCC clearance. Ext to Dec 20
10/12/2013Warrnambool Cheese & ButterWCBSaputo Inc14.65FIRB clearance. Closing early Dec 
18/10/2013Warrnambool Cheese & ButterWCBMurray Goulburn Co-operative Co0.00
Schemes of Arrangement
07/11/2013RHGRHGResimac-Australian Mortgage Acquisition Co0.00Vote Dec 18
04/12/2013Trust CompanyTRUPerpetual0.00Approved
Foreshadowed Offers
04/10/2013Billabong InternationalBBGCoastal Capital7.59Post re-financing/equity proposal
19/09/2013Billabong International (4)BBGAltamont Consortium4.00Post re-financing/equity proposal
19/09/2013Billabong International (4)BBGCenterbidge/Oaktree Consortium33.90Post re-financing/equity proposal
12/11/2013Commonwealth Property Office (1)CPADexus Property & Canada Pension Plan24.73Indicative offer
Source: NewsBites

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