After Tough 2022 Results, What’s Next For Rio Stock?

The shares of diversified mining giant Rio Tinto (NYSE: RIO) have gained almost 4% since early 2023, roughly in line with the S&P 500. The company recently posted earnings for Q4 and FY’22, with revenue for the full year declining by 12% to $55.6 billion, due to weaker price realizations for iron ore (down by about 26% year-over-year) and also due to sluggish shipments, amid weak demand from China. Rio’s adjusted earnings also declined by about 38% year-over-year to $13.3 billion partly due to higher energy prices. However, things could get better this year. The price of iron ore, which is its single largest product, accounting for two-thirds of Rio Tinto revenue, has been trending higher. Iron ore 62% Fe CFR futures have risen from around $79 per ton in early November 2022 to about $111 in early January, with prices surging further to about $127 per ton currently. The gains come as China eases some of its Covid-19 rules, signaling a revival in demand for steel and steel-making inputs, given that the country is the world’s largest consumer. Manufacturing activity has also picked up, with the Chinese manufacturing purchasing managers’ index (PMI) rising to 52.6 last month, the highest level since 2012, and up from around 50 in the previous month.

So is Rio stock still a buy? Rio Tinto stock trades about 9x our estimated 2023 earnings for the company. 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. Following the Fed’s big rate hikes over the past year, the effective federal funds rate stands at almost 4.6%  presently, and this could be poised to rise further, given the Fed’s continued hawkish stance. Moreover, despite positive developments in China, it still remains a tough market to gauge and the years of massive growth are clearly behind it. Rio also cut its full-year dividend, declaring a $4.92 per share dividend for the year, down from 2021’s record payout of $10.40 per share. That said, there are positives as well for Rio. 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 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 marginally 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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