The shares of diversified mining giant Rio Tinto (NYSE: RIO) have declined almost 6% year-to-date although it has been a bit volatile, tracking price movements of iron ore, which is its single largest product, accounting for two-thirds of Rio Tinto revenue in 2021. While iron ore prices are up marginally year to date trading at about $121 per ton, they remain down from highs of roughly $157 per ton in March 2022, and levels of around $220 in July 2021. Iron ore demand is highly dependent on uptake from steel makers in China and this has been hampered by Covid-19 restrictions in the country as well as a downturn in the Chinese real estate market. Moreover, the U.S. Federal Reserve and other major central banks have also been hiking interest rates at a more aggressive pace to combat surging inflation. This could hurt global growth and, in turn, impact demand from the key steel consumers such as the automotive and construction industry.
So what’s the outlook like for Rio stock? At its current market price of about $63 per share, Rio Tinto stock trades at just about 5x consensus 2022 earnings and around 6x projected free cash flows. Although cyclical stocks like Rio typically see lower multiples when the markets project that earnings and revenues are approaching a near-term peak, there are some factors that could help Rio. The EIA’s lower benchmark oil projections for 2023 and prospects of leniency in China’s Zero-Covid policy after Shanghai’s announcement to end lockdowns, may help demand to a certain extent if China’s industrial output picks up. Moreover, the troubles in China’s real estate sector have been well known for some time, and this probably means that this risk is already priced into the stock. While there are concerns regarding a downturn in the U.S. economy, indicators do not point to a very deep decline this time around, with household savings rising post the pandemic and banks also remaining well-capitalized. Rio’s balance sheet is also much stronger than before, with a net cash position standing at $1.6 billion at the end of 2021, compared to net debt of close to $4 billion in 2017.
There are some secular longer-term trends that could help Rio stock, as well. Investments in the renewable energy sector including electric vehicles, charging infrastructure, and solar & wind power plants are key markers supporting long-term demand for iron, aluminum, and copper. Rio has also been looking to build its presence in mining lithium, which is used to make electric-vehicle batteries. Earlier this year, the company bought the Argentina-based Rincon lithium project for about $825 million. Lithium demand has been soaring, with prices for lithium carbonate rising by over 4x over the past 12 months. This could also help the company in the long term.
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We value Rio Tinto stock at about $84 per share, which is about 30% ahead of the current market price. Our interactive dashboard on Rio Tinto’s valuation highlights the historical trends in revenues, earnings, valuation multiple, and forecast for FY2022.
|S&P 500 Return||-6%||-18%||74%|
|Trefis Multi-Strategy Portfolio||-3%||-22%||202%|
 Month-to-date and year-to-date as of 6/28/2022
 Cumulative total returns since the end of 2016