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Conviction sell: Rio downgrade gives entire iron ore sector a bloody nose

Investment bank Goldman Sachs on Tuesday downgraded Rio Tinto (NYSE: RIO) from ‘neutral’ to ‘conviction sell’ citing the world’s number two miner’s over-reliance on iron ore for its earnings.

The bank is concerned about the fact that 90% of Rio Tinto’s pre-tax profits came from the steelmaking ingredient in 2012 and sees “significant earnings declines if the company goes ahead with the Pilbara 360 project in a declining iron ore price environment.”

Rio Tinto is in the process of expanding production in the Pilbara region of Australia with a target of 290 million tonnes of annualized production by the end of the third quarter.

The London-based company is also in talks to sell its 58% holding in privately-held Iron Ore Company of Canada which it hopes will raise as much as $2 billion.

Rio Tinto’s ADRs suffered a 4.9% fall in heavy volumes in New York, dragging down the whole sector.

World number one iron ore miner Brazil’s Vale dropped 2.6%, while number three producer BHP Billiton declined 3%.

North American iron ore and coking coal miner Cliffs Natural Resources plummeted 6.6% after Goldman maintained a sell rating on the stock.

Year to date market value losses of the miners make grim reading: Rio Tinto and Vale are both down 19% in 2013, BHP is off 15% and Cliffs shareholders are nursing a 47% decline this year.

Rio Tinto is not the only company expanding production and with so much new supply coming on stream most observers predict a decline in iron ore prices in the medium term.

The benchmark CFR import price of 62% iron ore fines at China’s Tianjin declined slightly to $134.40 on Tuesday, but is still up over 50% since hitting three-year lows in September.

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