How Would Rio Tinto’s Stock Price Be Impacted If Iron Ore Prices Declined By 10% In 2019?

+17.17%
Upside
63.46
Market
74.35
Trefis
RIO: Rio Tinto logo
RIO
Rio Tinto

After a strong 2017 and posting impressive growth in the first half of 2018, we expect Rio Tinto (NYSE: RIO) to end FY2018 with $42.4 billion in revenues, which would be an increase of 6% over the previous year. Net income is likely to rise to $9,289 million with the net income margin being stable at 21.9%, in line with 2017 and H1 2018. Strong performance in 2018 was driven by a higher realized price of iron ore which was supported by rising demand for high grade ore from China. However, there are reports suggesting that this high demand situation in China may not sustain throughout the next year. There is one school of thought that has apprehensions about Chinese demand for iron ore remaining stagnant or even falling in 2019.  Thus, it would be interesting for investors to know the impact that a decline in iron ore price would have on Rio’s stock price.

Chinese demand significantly defines the iron ore market and price as nearly two-thirds of global exports go to China. More than 45% of Rio Tinto’s revenues for 2018 would be contributed by iron ore. Thus, a fall in the iron ore price would hit the stock significantly. Our scenario analysis, shows that a 10% decline in iron ore price in 2019 would lead to Rio’s stock price falling to $39.25, a decline of 15.9% from the current market price of $46.65. Current P/E ratio of 8.74 along with an expected EPS of $4.49 in 2019 (which marks a $0.85 drop from 2018 EPS) gives us an estimated stock price of $39.25.

View the interactive dashboard that we have created – Impact of 10% Decline in Iron Ore prices on Rio Tinto’s Stock Price – and modify the key drivers to arrive at your own EPS and price estimate for the company.

Relevant Articles
  1. Is Rio Tinto Stock Attractive At $62
  2. Down 9% This Year, What’s Next For Rio Tinto Stock?
  3. After Tough 2022 Results, What’s Next For Rio Stock?
  4. Is Rio Tinto Stock Still Good Value Following The Recent Iron Ore Rally?
  5. With Iron Ore Prices Under Pressure, What’s Next For Rio Stock?
  6. With Iron Ore Prices Volatile, Is Rio Tinto Stock Worth A Look?

 

We believe that a price decline would prompt a slight decline in shipments. Rio’s share of shipments is expected to go down to 272 million tons in 2019 as against 275 million tons in 2018. Along with lower volumes, a 10% lower realized price of $62.70/ton would reduce total iron ore revenues to $17.0 billion in 2019 from $19.2 billion in the previous year. Other segmental revenues would also likely take a hit as aluminum sales would be affected as well. We forecast a 5% decline in non-iron ore revenues in 2019, which would drive the consolidated revenue of Rio down by 8%, to $39.1 billion from $42.4 billion.

 

Net income margin for the company has remained stable in 2017 and H1 2018 at 21.9%; and we expect Rio to end 2018 at similar levels. However, a fall in the realized price per ton of iron ore would mean lower margin realized per ton sold. This would translate into a decline in net income margin on a consolidated basis. Lower revenues and a reduced NI margin of 20% next year, would lead to a 16% decline in net income to $7.8 billion in 2019. Number of outstanding common shares have remained stable for the company and the last reported number is 1,740.9 million shares (as of June 30, 2018). This translates into a $0.85 drop in EPS to $4.49 in 2019.

 

Iron ore price dropping by 10% is not a very likely scenario at present, since a few iron ore players (such as BHP) believe that there is still some time for Chinese steel production to peak and thus iron ore prices might not drop just yet. They might at best be stable if not rise. However, our scenario analysis above, tries to understand the impact on the stock if the apprehensions of the former school of thought (price decline) materialize. In such a case, as our valuation and analysis shows, a lower EPS of $4.49 (driven by lower revenues on the back of decline in iron ore revenue; and lower net income margin due to reduction in margin realized per ton) and a P/E ratio of 8.74, would lower Rio’s stock price to $39.25, which marks a downside of 15% against the current market price of $46.65.

 

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

More Trefis Research

Like our charts? Explore example interactive dashboards and create your own.