Quality Business But Fully Priced After 40% Rally
Rio Tinto delivered a strong 2025 result with underlying EBITDA of US$25.4 billion, up 9% on the prior year, and continued its streak of disciplined capital returns with a 60% payout ratio for the tenth consecutive year. There is a lot to like about how this business is being run. But after a 40% rally over the past six months, we think the stock is now trading at a premium that is difficult to justify relative to both its own history and its peer group. We are downgrading our rating to Neutral and setting a price target of A$165.00, which implies just 1% upside from the current share price of A$163.30.
Research published 24 February 2026. Price target and upside based on prices at time of publication.
About Rio Tinto
Rio Tinto is one of the world’s largest diversified mining groups, with operations spanning more than 35 countries. The company is organised around four product groups. Iron Ore, which is centred on its massive Pilbara operations in Western Australia, remains the largest earnings contributor. The Aluminium division runs a vertically integrated chain from bauxite mining through alumina refining to aluminium smelting across Australia, Canada, Brazil, and several other regions. Copper has grown in strategic importance through assets including Oyu Tolgoi in Mongolia, Kennecott in the US, and Escondida in Chile. The Minerals segment rounds out the portfolio with titanium dioxide, borates, and other specialty products. Rio Tinto is dual-listed on the ASX and the London Stock Exchange, with American depositary shares also trading on the New York Stock Exchange.
2025 Result Was Genuinely Strong
On the headline numbers, Rio Tinto’s 2025 result was impressive. Underlying EBITDA came in at US$25.4 billion, a 9% increase on the prior year, while net profit after tax was US$10.9 billion. Revenue for 2026E is forecast at US$55.9 billion with EBITDA of US$27.1 billion, and earnings per share of US$6.70. Pilbara iron ore shipments of 330 million tonnes continued to underpin the group’s cash generation, and the iron ore business remains among the lowest-cost producers globally.
The result was not without blemishes, however. Net debt rose to US$14.4 billion, above estimates, driven by higher-than-guided capital expenditure of US$12.3 billion. That capex figure includes spending on the Simandou iron ore project in Guinea, which has been a significant draw on capital. Management had previously guided to approximately US$11 billion in capex for the year, so the overshoot is worth watching as the project ramps up.
Aluminium Missed, Copper Delivered
Beneath the strong group numbers, there was a clear divergence between the two key growth commodities. Aluminium EBITDA missed expectations by roughly US$700 million. The shortfall was driven by a combination of higher production costs in North America, lower bauxite revenue, and elevated central costs. Management has flagged a cost-out program targeting approximately US$400 million in annualised savings, but that is yet to flow through in a meaningful way.
On the other side, copper EBITDA beat estimates by around US$400 million, with strong contributions from both Escondida in Chile and the Bingham Canyon mine in the US. Copper is becoming an increasingly important part of Rio’s earnings mix, and the outperformance in this division is encouraging. But it was not enough to fully offset the aluminium miss, and the net effect was a slight drag on overall group earnings quality.
That split matters because aluminium and copper combined represent roughly 40% of group EBITDA. Any sustained weakness in aluminium, or a pullback in copper prices, would have a material impact on earnings. Our commodity team expects both aluminium and copper prices to soften through the second quarter of 2026, which adds a layer of near-term risk to the earnings outlook.
Dividend and Capital Returns Remain Reliable
Rio Tinto declared a final dividend of US254 cents per share, bringing total dividends per share for the year to US$4.02, which equates to approximately US$4.1 billion in total returns to shareholders on the final dividend alone. The 60% payout ratio has now been maintained for ten consecutive years, and at the current share price the stock yields approximately 3.7%.
This is one of Rio Tinto’s key attractions and we do not think the dividend is at risk in the near term. Free cash flow generation remains healthy and management has been clear about prioritising shareholder returns alongside growth investment. For income-focused investors, the yield is decent but no longer exceptional compared to where it sat six or twelve months ago, given the share price appreciation.
The Simplification Strategy
One of the more interesting developments from the result was the articulation of a clearer simplification strategy. Management outlined plans to divest between US$5 billion and US$10 billion in non-core assets, deliver approximately US$650 million in annualised cost savings, and reduce medium-term capital expenditure by around US$1 billion to approximately US$10 billion per annum. These are meaningful numbers if delivered, and they point to a management team focused on tightening the portfolio and improving returns on capital employed.
Rio also confirmed that it had assessed and ultimately rejected a potential merger with Glencore. The strategic logic of a combination would have been interesting from a commodity diversification perspective, but the complexity and execution risk of such a deal likely outweighed the potential synergies. We think management made the right call in walking away.
On the acquisition front, Rio announced the Brazil Aluminium deal, paying approximately US$298 million for its share of a roughly 33% stake in a CBA joint venture with Chalco. This is a modest bolt-on that strengthens the aluminium footprint in South America, and at that price tag it does not move the needle on the group balance sheet.
Oyu Tolgoi and Simandou Remain Key Project Risks
The Oyu Tolgoi copper-gold mine in Mongolia continues to be a source of uncertainty. The Mongolian government has issued a further US$440 million tax assessment, bringing total possible additional payments to over US$1 billion. This is a dispute that has lingered for years and shows no sign of quick resolution. While we do not expect it to fundamentally impair the asset’s value, it is a drag on sentiment and a reminder that operating in frontier jurisdictions carries genuine sovereign risk.
Simandou, the massive iron ore project in Guinea, is progressing but remains a significant capital commitment. It was a key driver of the capex overshoot in 2025, and the project will continue to absorb capital over the coming years. The long-term prize is substantial, with Simandou expected to produce some of the highest-grade iron ore globally, but the execution timeline and capital discipline around the project will be closely watched by the market.
Valuation Is the Reason for the Downgrade
This is not a story about deteriorating fundamentals. Rio Tinto is a well-run, diversified miner with strong cash flow generation, a reliable dividend, and a management team that is making sensible strategic decisions. The issue is price.
At around A$163.30, the stock trades at approximately 7.5x next-twelve-month EBITDA. That is a meaningful premium to BHP, which trades in the 6.5x to 7.0x range, and it sits above Rio Tinto’s own 25-year historical average of 6.5x to 7.0x EV/EBITDA. After a 40% share price appreciation over the past six months, we think the market has already priced in the positives from the strong result, the simplification strategy, and the favourable commodity price environment.
Our net asset value estimate is A$175.8 per share, and while that sits above the current price, the gap is not wide enough to justify a Buy rating given the elevated multiple. With just 1% upside to our price target of A$165.00, the risk-reward balance has shifted. We need to see either a pullback in the share price or a step-change in earnings to move back to a more constructive view.
Commodity Outlook Adds Near-Term Caution
Our commodity forecasts suggest that both aluminium and copper prices are likely to pull back through the second quarter of 2026. Given that these two commodities together account for roughly 40% of Rio’s group EBITDA, any sustained price weakness would weigh on near-term earnings. Iron ore prices have been relatively stable, but the supply picture is evolving as new capacity, including from Simandou, begins to come online over the medium term.
We are not calling for a collapse in commodity prices, but the tailwinds that supported Rio’s share price rally over the past year are unlikely to persist at the same intensity. A more neutral commodity environment, combined with an already stretched valuation, is the core of why we think the stock is fairly priced at current levels.
Key Risks
Upside risks to our Neutral rating include a sustained rally in iron ore, aluminium, or copper prices beyond our current forecasts, faster-than-expected delivery of the cost-out program, and earlier resolution of the Oyu Tolgoi tax dispute. Commodity price strength remains the single biggest swing factor for Rio Tinto’s earnings and valuation.
Downside risks include a sharper-than-expected pullback in commodity prices in the second quarter of 2026, further capex overruns on Simandou, escalation of the Mongolian tax dispute, and execution risk around the non-core asset divestiture program. Any of these could see the stock de-rate from its current premium multiple.
Our View
Rio Tinto is a great business. The 2025 result confirmed that the operational machine is running well, the dividend is secure, and management is taking the right steps to simplify the portfolio and improve returns. But great businesses can be poor investments when the price is wrong, and we think the market has done a thorough job of pricing in the positives here.
At 7.5x NTM EBITDA, Rio trades at a premium to both its peer group and its own long-run average. The 40% rally over the past six months has compressed the upside to just 1%, and with commodity prices expected to soften in the near term, we do not see a catalyst for further re-rating. We are moving to Neutral with a price target of A$165.00. We would look to become more constructive on a pullback toward the 6.5x to 7.0x EBITDA range, or if earnings growth surprises materially to the upside.
If you would like to discuss Rio Tinto or any other investment opportunity, please get in touch with us. We are always happy to chat.
