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It's Still Too Early to Buy Rio Tinto

NEW YORK (TheStreet) -- It's not a good time for multinational mining giant Rio Tinto (RIO).

Last week analysts at Goldman Sachs took the unusual step of reiterating a sell rating on the company.

And on Tuesday, Rio Tinto announced a plan to slash spending to $8 billion by 2015, a 50% reduction. CEO Sam Walsh painted a gloomy picture for the near term, saying that he sees "market fragility and volatility," according to Bloomberg Businessweek.

But contrarian investors looking to place bets on a beleaguered company before its fortunes reverse may want to stay on the sidelines for a while longer.

Rio Tinto has been selling assets, buying back stock and reducing its debt, all of which can be viewed as defensive measures. It is also delaying an expansion in its iron ore operations in Australia until 2017, which could save it $3 billion.

The company's ADRs have struggled this year, as have shares of other miners. As of Monday's close, RIO Tinto's shares were down 6.6% year to date. BHP Billiton's (BHP) shares had declined 12% for the year, and Vale's (VALE) were down 25%. Even the iShares Global Materials ETF (MXI) has lost ground year to date, edging lower. Meanwhile, the S&P 500 has enjoyed a 26% rally.

A big driver for the poor returns has been slowing demand from China for coal, iron ore and copper. During the previous decade, there was robust demand from China for these resources as the country modernized its infrastructure and built what turned out to be massive ghost cities.

Before peaking in 2008, RIO, BHP Billiton and Vale rallied tremendously, outpacing the S&P 500 by very large margins.

The behavior here is not shocking in that the mining companies outperformed for a period of years, perhaps excessively so, and now they have rotated out of favor. This happens with every segment of the market.

One of the market darlings of the last five years has been (AMZN), which, of course, whipped up a lot of excitement this week when it announced it plans to make some deliveries in 30 minutes using drones. Its stock is up more than 800% since its bear market low. From 2003 until early 2007, however, it dropped 28% while the S&P 500 rallied 28%.

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