Is Rio Tinto Stock Attractive At $62

The shares of diversified mining giant Rio Tinto (NYSE: RIO) have declined almost 16% since early 2023, underperforming the broader markets. The company recently posted weaker-than-expected earnings for FY’23, with revenue declining by 2.7% year-over-year to $54.04 billion, and earnings coming in at $6.17 per share as the company was weighed down by lower commodity prices.  While prices for metals including aluminum and copper declined amid improving supply and modest demand growth in 2023, earnings benefited from marginally higher prices for iron ore and lower energy prices. Moreover, the company also benefited from higher shipments across its product categories, particularly for iron ore from the Pilbara mine. So what’s the outlook like for the stock?

The price of iron ore, which is Rio’s single largest product, accounting for two-thirds of Rio Tinto’s revenue, is seeing some pressure of late. Prices for Iron ore 62% Fe CFR have declined from $144 per ton in November 2023 to just about $110 presently.  The decline is being driven by concerns about headwinds in China, which is grappling with a real estate crisis and falling home sales. Moreover, maintenance downtime and higher environmental curbs in parts of the country are also weighing on demand. This is impacting the market for steel and steel-making inputs, given that the country is the world’s largest consumer. That said, the Chinese government could focus on stimulus to aid the economy. Moreover, the industrial sector in China is actually faring reasonably well, with industrial output growing about 7% in January and February versus the same period last year.  Demand for copper and aluminum is also expected to remain strong, led by investments in the renewable energy sector, including electric vehicles, charging infrastructure, and solar & wind power plants which are key markets supporting long-term demand for aluminum and copper. The market for copper is expected to remain tight, as Anglo American cut its projected copper production estimates for the next few years as it faces capacity constraints in the rail network.

RIO stock has seen a decline of 15% from levels of $75 in early January 2021 to around $65 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the decrease in RIO stock has been far from consistent. Returns for the stock were -11% in 2021, 6% in 2022, and 5% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that RIO underperformed the S&P in 2021 and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Materials sector including LIN, SHW, and SCCO, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could RIO face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Rio Tinto stock trades about 9x our estimated 2024 earnings for the company.  Rio’s balance sheet is also much stronger than before, with its cash and cash equivalents standing at about $9.6 billion at the end of the last quarter. Rio has also been looking to build its presence in mining lithium, which is used to make electric-vehicle batteries. The company recently announced that it would invest $350 million at its Rincon lithium plant in Argentina, as it looks to begin production by the end of this year. Separately, Rio could also see an upside from the Simandou mine in Guinea, which is the world’s largest undeveloped iron ore mine with high-grade ore. Rio plans to invest about $6.2 billion into the mine, rail, and port project in a partnership with seven other companies. We value Rio Tinto stock at about $74 per share, which is 17% ahead of the current market price. Our interactive dashboard on Rio Tinto’s valuation highlights the historical trends in revenues, earnings, the valuation multiple, and the forecast for FY2024.

[1] Returns as of 3/20/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates