Recently, the failed merger between BHP Group Ltd. (BHP) and Anglo American PLC (NGLOY) has been the talk of the mining sector.
Another significant mining corporation has persisted in operating without drawing attention to itself. Rio Tinto PLC RIO is that firm. Let us examine more closely what is going on behind the scenes at RIO.
Rio Tinto Produces Wealthy Veins
Why is Rio Tinto being so dull these days? This is because a large portion of the labor-intensive process of building up stockpiles of premium metals has already been completed. The BHP-Anglo agreement was centered on copper (HGU24). Rio, however, should not fear since its copper holdings are increasing quickly (more on that in a bit).
The amount of money Rio Tinto spends on research and development is a much-underappreciated asset. For instance, it declared the construction of a $142 million “microwave” in Western Australia in June. With the help of this facility, lower-grade iron ore from the Pilbara area will be transformed into a higher-grade ore appropriate for the next generation of steel mills, which will produce steel using electric arc furnaces instead of metallurgical coal. This is essential to the steel industry’s decarbonization.
With global decarbonization, iron ore products’ composition is likewise evolving. Rio anticipates that by 2035, the market for direct reduction iron will have doubled from 125 million metric tons to 250 million tons. This superior iron ore will be sold by the corporation from its Guinean mine, Simandou.
Rio Tinto has a lot more “iron in the fire” than just iron ore. At the moment, iron ore makes up around 70% of its earnings, followed by copper (10%), aluminum (10%), and diamonds, borates, and titanium (the remaining 10%). This is expected to change to 60% iron ore, 20% copper, and 15% aluminum by 2026.
Rio’s Attention to Copper
Its capital allocation per business sector, in my opinion, offers a more accurate indicator of the company’s prospects going forward and its commodities footprint. Based on this, its copper assets, valued at $21 billion, surpass its iron ore operations.
Rio’s $15 billion investment in Mongolia’s massive Oyu Tolgoi copper mine, whose output is only beginning to increase, accounts for a significant portion of that. Rio can overtake BHP in terms of copper output thanks to that mine; by the end of the decade, it may generate about 900,000 tons, a 50% increase from 2023.
Purchase RIO Shares
The low price of Rio Tinto’s shares may be explained by the increasing worldwide excess of iron ore. Based on forecasts from Goldman Sachs, it trades at only 4.5 times the projected EBITDA (earnings before interest, taxes, depreciation, and amortization), which is lower than the industry average of 5.5 times.
Additionally, the price/book multiple of 1.8 for the shares is below both the peer average and their five-year average. The company’s shares ought to be trading at a premium multiple given its spotless balance sheet and strong level of profitability.
FactSet reports that Rio Tinto now has a dividend yield of around 6.5%, which is higher than BHP’s 5.1% yield. Although dividends have decreased from their all-time highs in 2022, the average yield is still expected to be close to 6% for the foreseeable future. Rio Tinto’s generation of $30 billion in extra cash by 2030 is the reason behind this. Particular dividends might also be granted.
Investors are not fully appreciating how quickly Rio Tinto is changing
Copper has a more promising future than iron ore, which is hard to get enthused about. The demand for copper, a crucial component of everything associated with the energy shift, is predicted to almost triple by 2040. Along the way, supply shocks are anticipated since they occur annually.
Looking at things more broadly, Rio is one of the few miners that can maintain profitability throughout the commodities cycle because of its broad portfolio of durable assets and cheap operating expenses. A further benefit is that the majority of its income is generated by operations situated in the comparatively secure regions of North America and Australia.
Strong operating momentum, a robust financial sheet, robust free cash flow, appealing expansion prospects (particularly in copper), and a respectable dividend yield characterize the firm.
Rio Tinto’s narrative should get more colorful as a result of its growing exposure to the red metal. The stock, which has lost 8.5% of its value in 2024, is now under $70.
