The shares of diversified mining giant Rio Tinto (NYSE: RIO) have declined almost 16% year to date, underperforming the broader markets. The company recently posted higher shipments of both iron ore and bauxite for the third quarter of 2024, while aluminum and copper shipments declined. The company reported a steady performance in the half year of 2024, with revenues remaining more or less flat at $26.80 billion, and earnings increasing by almost 13% to $3.57 per share. Rio is on track to meet its full year production target for iron ore at 323-338 MT. 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, has remained subdued in 2024, though showing some improvement in the recent months. Prices for Iron ore 62% Fe CFR have declined from $110 per ton in March 2024 to just about $102 presently. Prices of iron ore had fallen to $92 levels in September and have since then improved, on the back of improving Chinese demand, with the completion of maintenance at steel mills. The decline is being driven by concerns about headwinds to iron ore demand in the major steel producing areas in the beginning of the third quarter, though this was somewhat mitigated by China’s stimulus measures in the recent months. While iron ore inventories at the ports in China were almost flat, the exports from the country declined nominally, but was still higher year to year.
Copper prices witnessed an increase with higher demand from China, though the demand from the rest of the world remained mixed. The big news for Rio however, is the acquisition of lithium miner Arcadium Lithium plc, which would make the company among the top lithium miners in the world. Demand for lithium has been increasing with higher electric vehicle sales due to energy transition. Rio has a current lithium capacity of 75,000 MT per annum and is set to double this by 2028. As China’s property market continues to remain down, the future of the commodity market lies with the renewable energy sector, including electric vehicles, charging infrastructure, and solar & wind power plants.
Overall, the performance of RIO stock with respect to the index over the last 4-year period has been quite volatile. Returns for the stock were -1% in 2021, 18% in 2022, and 11% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and multiple wars, 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 strong jump?
Rio Tinto stock trades about 8x 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 $9.7 billion at the end of June quarter. Rio has also been looking to build its presence in mining lithium, which it hopes to achieve with the acquisition of Arcadium. Separately, Rio could also see an upside from the expected commencement of production from the Simandou mine in Guinea from next year, which is the world’s largest undeveloped iron ore mine with high-grade ore. The company also hopes to mine its first lithium from the Rincon starter plant by the end of this year. We value Rio Tinto stock at about $77 per share, which is 22% 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.
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