Has Rio Tinto Peaked Even Before The End Of Covid-19?

Rio Tinto stock (NYSE: RIO) has rallied 52% since late March (vs. about 35% for the S&P 500) to its current level of $56. This is after falling to a low of $36.42 in late March, as a rapid increase in the number of Covid-19 cases outside China spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 4% above its February 2020 high of $54. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock has risen and recovered as per its potential, and think the stock price is now likely to hover around the current level in the near term. Our conclusion is based on our detailed comparison of Rio Tinto’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did Rio Tinto Stock Fare During 2008 Downturn?

We see RIO’s stock declined from levels of around $90 in October 2007 (the pre-crisis peak) to roughly $23 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 74% of its value from its approximate pre-crisis peak. This marked a drop that was higher than the broader S&P, which fell by about 51%.

However, RIO’s stock recovered strongly post the 2008 crisis to about $56 in early 2010 – rising by about 144% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, RIO’s stock lost 33% of its value between 19th February and 23rd March 2020, and has already recovered 53% since then. The S&P in comparison fell by about 34% and rebounded by about 35%.

Is The Recovery Warranted & Can We Expect Further Gains?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which largely quieted investor concerns about the near-term survival of companies. The flattening of Covid cases in the worst hit U.S. and European cities is also giving investors confidence that developed markets have put the worst of the pandemic behind them.

The outbreak and global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. The iron ore demand from industry players affects global iron ore price levels, in turn impacting the company’s price realization for its products. Lower demand from construction players and shedding of capacity by major steel companies, mainly in China, has led to a drop in global iron ore prices. Additionally, the lockdown is affecting the global supply chain for companies like Rio Tinto which have operations spread across geographies, leading to a decline in production and shipments. A drop in copper and aluminum prices is also set to hit a diversified miner like RIO.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to boost market expectations. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become more important in finding value. Q1 2020 saw only a partial impact of the current crisis, with the actual gravity of the situation likely to be reflected in the half yearly results (likely to be out in July-August this year), which are expected to report a sharp decline in Rio Tinto’s revenues and earnings year-on-year.

However, as the global lock downs are lifted gradually, iron ore demand is expected to rise with supply constraints lessening. This is likely to lead to an uptick in shipments toward the end of 2020. Global iron ore price has also increased since April, from $80/ton to over $100/ton currently. With investors’ focus shifting to 2021, the stock has recovered sharply in the last three months and is likely to hover around the current level of $54-$56. As per Rio Tinto valuation by Trefis, we have a price estimate of $55 per share for Rio’s stock, close to its current market price.

So, while Rio Tinto seems to be fairly valued as of now, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight in to the iron ore space, here’s how Vale compares with Cleveland-Cliffs.

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