Rio Tinto Group RIO shares have gained 10.3% in the past week, outperforming the industry's 9.7% rise and the Basic Materials sector’s 4.9% return. The S&P 500 has moved up 0.4% in the same timeframe.
The recent jump in the RIO stock is attributed to China’s announcement of the largest stimulus package since the pandemic in an attempt to revive its economic growth to its 5% target for 2024. This has led to a much-awaited recovery in iron ore prices, which so far have been weighed down by weak demand in China.
Copper prices have also gained on the upbeat demand prospects in the world’s largest consumer. Earlier, the U.S. Federal Reserve announced an aggressive interest cut of half a percentage point, which also boosted copper prices.
RIO Performance in the Past Week Vs Broader Market
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RIO Trades Above 50 & 200-Day SMA
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RIO has reached a key support level from a technical perspective. On Sept. 23, the stock crossed its 200-day simple moving average (SMA), indicating a long-term bullish trend. The stock is trading above its 50-day and 200-day moving averages, as shown in the chart below. This highlights positive market perception and confidence in RIO’s growth prospects.
RIO shares closed at $71.23 on Friday, which is 5.1% below the 52-week high of $75.09 reached on Dec. 28, 2023. Investors are now wondering if this momentum will continue and whether it is the right time to buy the stock or wait for a better entry point. Let us take a look at RIO’s fundamentals to analyze the stock.
Solid Balance Sheet Positions RIO to Invest in Growth
Balanced Capital Allocation Strategy: Rio Tinto has a total debt-to-total capital ratio of 0.20, lower than the industry’s 0.26. Its financial strength allows it to simultaneously invest in growth projects and maintain shareholder returns. Rio Tinto continues to earmark $10 billion for capital expenditure per year. This includes $7 billion to be spent on existing projects, high-returning replacement projects and decarbonization efforts. The growth capex is estimated at up to $3 billion per year.
Solid Portfolio of Projects: Rio Tinto has a robust portfolio of projects with activity in 18 countries across eight commodities in the early exploration and studies stages. Simandou (iron ore) and Oyu Tolgoi (copper) are the primary growth projects. The high-grade Simandou project is set for its first iron ore production at the end of 2025 and will ramp up to 60 million tons by 2028.
Oyu Tolgoi is ramping up to deliver 500 kt per year of copper from 2028 to 2036. Rio Tinto is investing in growth in the Pilbara to raise its mid-term capacity of 345 to 360 Mtpa (100% basis), subject to delivery of the next tranche of replacement mines.
RIO plans to deliver around 3% of compound annual growth in copper equivalent production from 2024 to 2028 from existing operations and projects.Decarbonization Remains Top Priority: In July 2024, Rio Tinto announced the installation of carbon-free aluminum smelting cells using the ELYSIS technology at its Arvida smelter in Quebec. It is investing in a research and development facility in Western Australia to test the effectiveness of its breakthrough low-carbon ironmaking process, BioIron.
Rio Tinto signed 20-year electricity arrangements, backed by renewable electricity, to secure the future of the Tiwai Point aluminum smelter in New Zealand. RIO is looking at other avenues to lower its carbon footprint. It recently announced that it would invest in Pongamia seed farms in Australia to explore the possibility of using it as a feedstock for renewable diesel.
Acquisitions to Boost Portfolio: In 2022, RIO acquired the Rincon lithium project in Argentina. Rincon is on track for the first lithium production from the starter plant by the end of 2024.
Last year, Rio Tinto acquired a 50% equity stake in the Matalco business from Giampaolo Group., securing a leading position in the rapidly growing North America recycled aluminum market. The demand for recycled aluminum in the United States is projected to increase by more than 70% from 2022 to 2032, driven by the transportation, construction and packaging sectors.
Per recent reports, Rio Tinto is eying Teck Resources TECK as a potential acquisition target. Following the sale of its steelmaking business, Teck Resources is focusing on copper and zinc, which are expected to play key roles in the energy transition trend.
Pickup in Commodity Prices Bodes Well for Rio Tinto
Iron Ore prices have declined 31.8% since the beginning of 2024 due to the weak demand in China amid the prolonged property crisis. However, prices have recovered to around $93 per ton lately, buoyed by China’s implementation of various economic support measures, which investors believe could bolster the demand for commodities.
Copper and aluminum prices have also gained on the back of these stimulus measures. Copper prices have gained 17.34% year to date and aluminum prices have moved up 10.11%.
Lithium prices have, however, declined 21.76% so far this year amid robust supply growth in key producing countries.
Growth in world steel production, spurred by urbanization, will fuel the demand for iron ore and support its prices in the long term. Copper prices will be supported by demand in the electric vehicle market and renewable energy investments. While the prices of lithium (a critical mineral in the global transition to clean energy) have been down this year, its long-term fundamentals are solid.
RIO Offers Industry-Leading Dividend Yield & Returns
RIO’s current 4.96% dividend yield is higher than the industry’s 3.40%. It has a five-year dividend growth rate of 5.5%. The company declared $2.9 billion of dividends for the first half of 2024, translating to a 50% payout.
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Rio Tinto’s Return on Equity (ROE) stands at 20.86%, ahead of the industry’s 2.06. ROE is a profitability measure of how prudently the company is utilizing its shareholders’ funds. This outscores miners like BHP Group’s BHP ROE of 20.2%, Teck Resources’ 6.5% and FreeportMcMoRan’s FCX 7.6%.
What Does RIO’s Valuation Suggest?
Rio Tinto’s valuation remains attractive. The company trades at a forward price-to-earnings multiple of 9.78, lower than the industry's 13.39. Presently, RIO has a Value Score of A.
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The company is also trading at a discount compared with BHP Group, FreeportMcMoRan and Teck Resources.
Near-Term Concerns for RIO
Rio Tinto Expects Lower Copper Production Rate for 2024: In the second quarter of 2024, the company made changes to the mine plan at Kennecott to manage geotechnical risk in the area. This delayed access to pit ore resulted in additional lower-grade stockpiled material being processed. Rio Tinto is reworking the mine plan and guided copper production for fiscal 2024 to be near the lower end of the earlier stated 660-720 kt. This suggests year-over-year growth of 6%, lower than the earlier projected 6-16%.
Iron Ore Production in 2024 to Dip 0.4% at the Midpoint: RIO’s iron ore production was down 2% year-over-year in the first half of fiscal 2024 to 157.4 Mt and shipments also declined 2% to 158.3 Mt. A train collision in May, which resulted in around six days of lost rail capacity and full stockpiles at some mines led to the decline in both the metrics.
Rio Tinto expects Pilbara iron ore shipments (100% basis) to be 323-338 Mt in 2024, indicating a 0.4% year-over-year dip at the mid-point. The company expects SP10 levels, which include other lower-grade products, to remain elevated until replacement projects are delivered.
Reduced Rate at Gladstone to Impact Alumina Output: Alumina production is anticipated between 7 Mt and 7.3 Mt (previously 7.6-7.9 Mt) for fiscal 2024. This is lower than the reported output of 7.5 Mt in 2023 as the Gladstone operations continue to operate at reduced rates following a fire that impacted a third-party gas pipeline. Rio Tinto expects gas supplies from the pipeline to resume normally by the end of this year. Aluminum production is anticipated to be 3.2-3.4 Mt, whereas it produced 3.3 Mt in 2023.
Costs to Weigh on Rio Tinto’s Near-Term Margins
The impacts of 3.5% inflation on RIO’s cost base lowered its underlying EBITDA year over year by $0.3 billion in the first half of 2024. The easing of diesel prices and lower prices for natural gas offset some of this impact.
Rio Tinto remains focused on cost control, maintaining discipline on fixed costs, which are expected to increase in 2024. Tightness in the company’s key labor markets continues to lead to higher costs.
Pilbara Iron ore unit costs are projected at $21.75-$23.50 per ton for 2024, suggesting growth from the $21.50 per ton reported in 2023. This reflects the increased work effort in the mines, and inflation in the costs of labor and parts in Western Australia. However, copper unit costs are expected at $1.40-$1.60 per pound due to higher volumes at Oyu Tolgoi, whereas it reported $1.95 in 2023.
RIO’s Falling Earnings Estimates Reflect Low Production View
The Zacks Consensus Estimate for Rio’s earnings for 2024 and 2025 for RIO has undergone negative revision activity, as shown in the following charts.
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The Zacks Consensus Estimate for 2024 earnings is pegged at $7.23, suggesting a year-over-year dip of 0.3% due to a low production outlook and inflated costs. Earnings are expected to rise 1% in fiscal 2025.
To Sum up: Hold on to RIO Stock for Now
Despite the recent rise in commodity prices, a weak production guidance and inflated labor costs, as reflected in the downward revision in earnings estimates is concerning. While Rio Tinto’s attractive valuation, and industry-leading dividends and capital returns are noteworthy, we recommend that investors wait for a better entry point.
Those, who already own the RIO stock, should maintain their positions to benefit from the company’s solid project portfolio and the long-term positive outlook for commodity prices.
Rio Tinto currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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