Is Rio Tinto Stock Still Good Value Following The Recent Iron Ore Rally?

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RIO: Rio Tinto logo
RIO
Rio Tinto

The shares of diversified mining giant Rio Tinto (NYSE: RIO) have gained almost 10% over the last month and remain up by over 30% since early November, tracking the price movements of iron ore, which is its single largest product, accounting for two-thirds of Rio Tinto revenue . Iron ore 62% Fe CFR futures have surged from around $79 per ton in early November to levels of about $109 currently. The gains come as China eases some of its Covid-19 rules, potentially signaling a revival in demand for steel and steel-making inputs, given that the country is the world’s largest consumer. Moreover, the country has indicated comprehensive support measures to prop up its property sector, which has been reeling under liquidity issues and weak demand. Further, the Federal Reserve has also slowed the pace of its rate hikes, announcing a 0.5% hike this week, after four straight 0.75% hikes at its most recent meetings, as inflation shows signs of easing.

So what’s the outlook like for Rio stock?  Rio Tinto stock trades about 9x consensus 2022 earnings. Although this is a relatively attractive multiple, the outlook for Rio remains a bit uncertain in the current environment. The U.S. housing sector is slowing down and there are also concerns about a broader recession in the U.S., as the Fed is likely to continue with its hawkish stance, although the pace of rate hikes is likely to moderate. Moreover, despite positive developments in China, it still remains a tough market to gauge and the years of massive growth are clearly behind it. That said, there are some positives as well for Rio. Rio’s balance sheet is also much stronger than before, with its cash and cash equivalents standing at $11 billion at the end of the last quarter. 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 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. We value Rio Tinto stock at about $75 per share, which is about 5% 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.

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Returns Jun 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 RIO Return -14% -6% 64%
 S&P 500 Return -6% -18% 74%
 Trefis Multi-Strategy Portfolio -3% -22% 202%
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[1] Month-to-date and year-to-date as of 6/28/2022
[2] Cumulative total returns since the end of 2016

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