The shares of diversified mining giant Rio Tinto (NYSE: RIO) have declined almost 9% year-to-date, considerably underperforming the S&P 500 which remains up by about 12% over the same period. The underperformance comes as the prices for iron ore – which accounts for over half of Rio’s revenues – have cooled, declining from about $130 per ton in March to levels of about $105 presently. Concerns about the global economy and the relatively uneven pace of the economic recovery in China – the world’s largest steelmaker – following the easing of Covid-19 restrictions, have also been weighing on the mining sector. The prices of copper – the company’s second-largest revenue contributor – have also been trending lower, falling to about $3.80 per pound from over $4.20 per pound earlier this year. However, there are a couple of good reasons to look at the stock at current levels.
While Rio doesn’t report its earnings for Q1, it does provide a production update and things appear to be looking up on the iron ore production front, after witnessing some stagnation in recent years. Production from the company’s mines in Pilbara rose 11% year-over-year to 79.3 million tons, while shipments jumped by 16%, driven by stock drawdowns. Rio Tinto stock also trades at just about 8x our estimated 2023 earnings for the company. Rio’s balance sheet is also much stronger than before, with its cash and cash equivalents standing at about $7 billion at the end of last year. There are some secular longer-term trends that could help the stock, as well. Investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar & wind power plants are key markets supporting long-term demand for iron, aluminum, and copper. In March, the company finally began underground production at its Oyu Tolgoi copper mine in Mongolia, following a roughly $7 billion expansion that was marred by delays and disputes. Oyu Tolgoi is poised to become the fourth-largest copper mine in the world toward the end of this decade. Rio has also been looking to build its presence in mining lithium, which is used to make electric-vehicle batteries. We value Rio Tinto stock at about $75 per share, which is 16% 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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