15 - 21 February 2001

Investors Corner

The Market
Leading shares in London closed weaker on Friday, just holding off their worst levels for the day, ending a dull week in lacklustre fashion as Wall Street extended its recent downwards trend, with a further sell-off in telecom, media, and technology (TMT) the main depressant. By the Friday close, the FTSE 100 index was 41.8 points lower at 6,164.3, shy of its session low of 6,153.7 hit around 12.30pm, and well off its opening peak at 6,213.6.
All the broader FTSE indexes were weaker, with the techMARK 100 index sliding 49.84 points to 2,591.49 as Nasdaq dropped back once again. Volume was solid by the close, with 2.303 billion shares changing hands in 108,616 transactions – boosted by hefty trading in Vodafone (587 million) and Invensys (97 million).
After opening slightly higher in slow early trade, UK blue chips soon turned weaker under the influence of overnight falls on Wall Street, struggling to find direction with Thursday’s – anticipated – 25 basis point UK interest rate cut fully discounted. Early trading was quiet – after a fairly hectic week – with no major economic data released.
Sentiment was also constrained by the fact that commentators believe that the Bank of England interest cut is expected to be the only one for a while – at least until a UK General Election is out of the way, possibly scheduled for May. There was little corporate news to provide much other direction either, so further contemplation of the previous day’s glut of blue chip results was the main feature.
London shares just drifted back throughout the morning session, with little to provide any break on the negative sentiment, and expectations for much of the same on Wall Street keeping the mood glum. Sentiment was further knocked in the afternoon by news that US telecoms group Lucent is being investigated by the US Securities and Exchange Commission for accounting irregularities, and with reports that PC maker Dell is about to unveil cost saving plans – including employee redundancies – because of the industry-wide slowdown.
Wall Street shares slid back early on in reaction to such news, with the Nasdaq index – not surprisingly – the worst off, keeping London shares under pressure in the afternoon. By London’s close, the DJIA was 50.36 points weaker at 10,830.19, just holding off its lows for the session, with the Nasdaq index down 66.15 points at 2,495.91, near its worst levels for the day.
Invensys was the one of the biggest blue chip fallers on Friday, and the second biggest traded stock in the market - after Vodafone, falling back further in the afternoon despite denials of earlier rumours that CSFB had downgraded estimates for the stock, and of talk the group is set to issue a profit warning.
These denials by both company and broker left investors pondering the real reasons for the sharp sell-off, with dealers pointing out that the stock’s recent fairly gentle recovery in reaction to some reassuring news from its troubled Baan software acquisition could hardly justify such sharp profit taking. Invensys shares dropped 16-1/4 pence to 163-3/4 pence.
Autonomy was the biggest FTSE 100 faller, spooked by news that ENIC has called an EGM to seek shareholder approval to dispose of its 2.8 per cent stake in the Cambridge-based software group – although a spokesman for ENIC said permission was being sought merely to keep the group’s options open. Autonomy’s shares shed 188 pence at 1,745 pence, with concerns over a potential stock overhang compounded by talk that Apax – another large shareholder – may look to sell after its lock-up expires on 15 February.
Other selected blue chip technology stocks were knocked back by Nasdaq’s ongoing retreat, amid continuing earnings worries following the Cisco disappointment this week. ARM Holdings dropped 23-1/2 pence to 443-1/2, while Misys lost 28 pence at 595, Sage Group shed 14 pence at 326, and CMG fell 33 at 877.
Elsewhere, BT was under pressure again, following Thursday’s falls after disappointing third-quarter numbers. The Financial Times reported that the telecoms blue chip would consider an emergency rights issue as a last resort if current money-raising schemes fall by the wayside. Citing BT finance director Philip Hampton, the paper said it would only be considered if alternative options to bring down the group’s £30 billion net debt levels fail. BT shares fell 25 pence to 595.
Telecom peers Vodafone – down 9-3/4 pence at 216-1/4 - and Energis off 17 pence at 495 also suffered from mounting concerns over debt levels in the sector. Colt Telecom also fell back after news of a downgrade in rating by SG Securities to “hold” from “buy” – Colt shares lost 55 pence at 1,485 pence. Media issues also suffered, with BSkyB shedding 62 pence at 975 in continuing reaction to post-results downgrade by Merrill Lynch, while Telewest shed 11-3/4 pence at 135-1/2, and Carlton Communications lost 19 at 482 as concern over significant cuts in advertising spend going forward.
However on the positive side, Centrica sparkled among the FTSE gainers on Friday, supported by news of price changes at its British Gas Trading arm.
British Gas is to increase prices for all its domestic gas customers from 1 April, but will cut prices for its domestic electricity customers from the same date. Ahead of the news, UBS Warburg upgraded its stance on Centrica to “buy” from “hold”, upping its price target for the stock to 270 pence from 240. In response, Centrica shares gained 12 pence at 247, while Lattice Group – demerged from BG PLC last year – added 5-3/4 pence at 137-1/4 in sympathy.

Rio Tinto
Rio Tinto, the metal and mineral mining group, reported that the emergence of a number of opportunities to add value through acquisitions resulted in considerable corporate activity in 2000. It also announced that good progress is being made in assessing and integrating these assets although it was late in the year before some came into the Group and the full impact on earnings, especially of North, Ashton and the coal acquisitions, will only be seen in 2001 and subsequent years.
Main production growth was in the Aluminium and Iron Ore product groups. Aluminium growth was mainly due to the increased stake in Comalco, while growth in iron ore came from strong demand for steel in Asia, leading to record production for Hamersley Iron. Gold production decreased due to lower output from the Freeport joint venture, Cortez and Kelian and the closure of Ridgeway but is expected to recover in 2001. Copper production increased slightly, with higher production at Kennecott Utah Copper and Grasberg offset by lower production at Escondida and Neves Corvo.
In Australia, coal production was up due to an increased contribution from the Kestrel mine, while US coal production was down slightly, as sales opportunities at low prices in the first half were deliberately not pursued.
Net earnings increased by $225 million to $1,507 million, which was 18 per cent above the $1,282 million for 1999. Earnings benefited by $254 million from higher selling prices, with copper prices averaging 14 per cent above 1999 levels and aluminium prices up 13 per cent. Market prices were also higher for the Group’s diamonds, iron ore and US domestic coal; though prices for seaborne coal were lower. Furthermore, movements in exchange rates increased earnings by $144 million.
Rio Tinto’s margins were strengthened by an 11 per cent reduction in the average Australian dollar exchange rate in US dollar terms. Overall, volume changes added $33 million to earnings. This includes the part year impact of acquisitions made during the year. Sales tonnage increased by nearly 13 per cent at Hamersley.
Overall, acquisitions during the year added $12 million to earnings after recognising restructuring costs and the costs of financing these investments. The seven months’ contribution from the additional investment in Comalco had a positive impact on earnings of $34 million. The earnings impact in just over four months from North and one month from Ashton diluted earnings by $22 million as a result of restructuring costs and because synergies with the various Group operations were yet to be visible in earnings.
Rio Tinto’s second half earnings were $153 million higher than the first half of 2000 due largely to increases in volumes, particularly in the copper operations. Hamersley’s volumes also grew further and there was a seasonal increase in titanium dioxide feedstock sales.
During the year, shareholders’ funds increased by $248 million with earnings of $1,507 million being partly offset by dividends of $790 million and adjustments of $561 million on currency translation. The latter was due largely to a 15 per cent decline in the Australian dollar. Net debt increased to $5.1 billion as a result of the acquisitions made during the year.
After further substantial additions to the resource base in the past 12 months, the long-term outlook is encouraging for Rio Tinto.
The metal consuming sectors of the US economy are already in contraction and have been for several months. Automobiles, capital equipment and construction are all under pressure and the state of the US economy is the dominant influence in global metals consumption. However, the metal markets appear to have already discounted the downturn, unless the landing is very hard.
Stocks of metals have been unusually low relative to consumption and would normally have prompted higher prices than the company saw in the second half of 2000 and into 2001. Outside the US, the picture is not as bad. Hopes of a substantial Japanese recovery are proving to be short-lived but Chinese consumption of metals continues to grow strongly, while Europe should achieve modest growth.
Overall, new metals and minerals capacity is limited and, in the US, power problems in the Pacific Northwest are impacting aluminium production particularly hard. Assuming the economic slowdown is short-lived, metal prices should strengthen as faster economic growth resumes.
Analysts believe that Rio Tinto is well placed to weather any downturn, and its track record of squeezing costs and integrating acquisitions is enviable. But, after a strong recent run, much of this is already in the price.