rio's kickin' it's butt, page-12

jp morgan adjust commodity price forecast JP Morgan The Next To Adjust Commodity Prices
December 13 2005 - Australasian Investment Review

‘Tis the season to be jolly, and to jolly well make sure your commodity price forecasts are up to date before the break. JP Morgan is the latest broker to reassess.

The analysts have revised earnings assumptions for Rio Tinto (RIO), BHP Billiton (BHP) and Alumina (AWC) after
upgrading copper, zinc and aluminium price forecasts in the second half of 2005, and 2006. They have downgraded thermal coal price assumptions by 15% from US$54.00/t to US$45.90/t as of April.

Changes to Rio’s earnings have been marginally negative beyond 2006 with 15% coal price downgrades negating the approximately 5% base metal price upgrades. The analysts forecast copper and aluminium to contribute 29% to earnings in 2006 versus 16% from energy coal.

Rio has now reached the analysts’ target of $62.00, but they are maintaining Overweight in the belief that the super-cycle scenario suggests further upside risk to the $70.00 mark. BHP comes in for similar treatment, with its $23.00 target now revised to $25.00.

BHP's earnings in FY06 are more leveraged to copper and aluminium (approximately 27% of earnings) with energy coal forecast to contribute only 7%. BHP earnings have, however, been adversely impacted by downward revisions to the analysts’ oil production forecasts. FY06 earnings have been revised upwards by 0.6% and FY07 earnings downwards by 5.4%. Oil production has been revised downwards 2.2% in FY06 and 8.8% in FY07 following further detail on the impact of hurricanes Rita and Katrina.

The analysts have upgraded their Alumina earnings forecasts 4.2% in 2005 and by 16.8% in 2006 following upgrades to aluminium price forecasts. Their view of
linkage rates remains, with an expectation that total contract volume to be renegotiated in 2006 will be under 10% versus the 30% volume renegotiation in 2005. Alumina Ltd has minimal exposure to spot alumina sales and the spot alumina/aluminium linkage. Neutral retained.