Rio Tinto (ASX:RIO) Solid Commodities Exposure And Lucrative Dividend

Today we will look at why we think Rio shares (ASX:RIO) look like a good opportunity in our RIO share price forecast and analysis.

Rio Tinto is a global mining and metals company with operations spanning 35 countries. Its organisational structure is built around its four major products, namely Iron Ore, Copper, Aluminium, and Minerals.

The company, which was founded in 1873, is a global leader in the production of iron ore, copper, and aluminum, while its Minerals business includes iron ore pellets and concentrate, titanium dioxide, borates, diamonds, and certain critical minerals derived from the processing of mining waste and by-products.

RIO’s shares are dual-listed on the London Stock Exchange and the ASX, while American depositary shares are traded on the New York Stock Exchange.

Over the past 12 months, Rio shares have outperformed the ASX 200 by a substantial margin.

At the current RIO share price, Rio shares are up 10.05% during that period versus the ASX 200’s loss of 0.19%.

About Rio Shares (ASX:RIO)

Founded in 1873, Rio is a mining behemoth with a market capitalization of A$179.33 billion.

The company’s Iron Ore business comprises a network of 17 iron ore mines, four port terminals, a rail network spanning nearly 2,000 kilometers, and related infrastructure in the Pilbara region of Western Australia.

Its AutoHaul train system is the first fully autonomous, long-distance, heavy-haul rail network and is said to be the world’s largest robot.

Rio’s Copper business comprises three operational sites in the US, Mongolia, and Chile.

Additionally, three growth projects are located in the US, Mongolia, and Australia.

In Aluminium, Rio runs a very large-scale, vertically integrated business that straddles four bauxite mines in Australia, Brazil, and Guinea; four alumina refineries in Australia, Brazil, and Canada; and 14 aluminum smelters in Canada, Australia, New Zealand, Iceland, and Oman.

It also operates seven hydropower plants in Canada.

The Minerals business has four sectors: Iron Ore, Iron & Titanium, Borates, and Diamonds.

These span six mine sites; three by-products recovered from waste; and seven smelters, refineries, and processing plants.

In 2021, Rio had 49,000 employees, 37,000 suppliers, and 2,000 customers.

China’s Reopening Presents A Huge Opportunity For Rio (ASX:RIO)

While iron ore is Rio’s bread-and-butter product, China imports about 70% of global ore output.

The extended COVID-19 restrictions in China, the country’s deteriorated relationship with Australia, and the travails in its real estate sector all acted as a dampener on the prices of iron ore.

Iron ore which traded at around US$225/t in July 2021, fell as low as $81 in November 2022.

However, over the last couple of months, the Chinese authorities have made a series of policy U-turns, starting with the removal of COVID restrictions, presumably in favour of restoring economic progress.

They have also climbed down from their hostile attitude towards imports such as coal from Australia.

China has also announced economic sops for example in the property sector, by relaxing certain strictures on borrowing by market players.

Its central bank has taken a dovish approach and tended to lower interest rates in an approach contrarian to global trends.

These actions have galvanized metals prices such as iron ore and copper, and that has rubbed off on the fortunes of Australian mining companies.

It may be noted that the BHP Group (ASX: BHP) stock flirted with record highs around $50 several times in mid-January.

In its Production report for the December 2022 quarter, RIO observed: “Iron ore Platts CFR prices rebounded 22% in the quarter and market sentiment strengthened after Beijing released three stimulus packages in November to stabilise the real estate market by lifting all previously applied financing constraints on property developers.”

Analysts at Citigroup said in a note last month that iron ore prices could reach for $150/t in the next six months in the event China steps on the re-opening pedal.

Note that China accounted for a massive 43.07% of the global iron-ore demand at 1.12B tonnes and 53.19% of the global copper demand at 12.5M tonnes in FY2021.

Significantly, both Vale (NYSE: VALE) and Rio (ASX:RIO) have said they will not add further iron ore production this year – while Rio has forecast flat iron ore shipments and higher costs in 2023, Vale anticipates a flat output of 310M-320M tons.

This could bullishly underpin ore prices this year.

However, longer-term, Rio is advancing its giant Simandou iron ore mine in Guinea, the world’s largest undeveloped iron ore project.

Earlier this month, Rio Tinto’s Guinea unit agreed terms with joint venture partners including China’s Baowu on developing infrastructure for the huge Simandou iron ore mine.

Rio also entered a $2 billion deal with the largest Chinese state-owned steelmaker China Baowu Steel Group — Rio Tinto’s largest customer — to develop iron ore mines in the Pilbara region of Australia.

It also entered a deal with Australian miner Wright Prospecting to commence exploration at what is said to be “one of the biggest and best-undeveloped iron ore deposits on the planet” at Rhodes Ridge in the Pilbara.

Meanwhile, Rio also noted in its Q4 report that the LME cash aluminum price increased 8% while the copper LME price rose 10% in the fourth quarter.

Clearly, China’s reopening and economic resurgence would be a shot in the arm for RIO, particularly it’s iron ore and copper businesses.

Resolution in Mongolia Adds To Rio’s Strength In Copper, A Metal Key To The Global Energy Transition

According to a Bloomberg report, the global copper market of copper could swing to a deficit in the face of rising demand for applications in the energy transition and decarbonization, and supply problems due to increasing mining difficulty.

New copper mining projects would be faced with more complex issues relating to water management, community engagement, and broader environmental permitting than previously.

Meanwhile, Rio last month completed its acquisition of Turquoise Hill Resources Ltd (TRQ) (NYSE: TRQ) for a consideration of approximately $3.1 billion, thus simplifying its ownership of the world-class Oyu Tolgoi mine in Mongolia, and significantly strengthening its copper portfolio.

Rio now holds a 66% direct interest in the Oyu Tolgoi copper project with the remaining 34% owned by the Government of Mongolia through Erdenes Oyu Tolgoi.

Therefore, the company “on a Rio Tinto share” basis, changed its 2023 guidance for mined copper production from 550 to 600 thousand tonnes to 600 to 655 thousand tonnes reflecting its increased ownership in the Oyu Tolgoi copper mine in Mongolia from 33% to 66%.

The resolution in Mongolia has come at a highly opportune moment when the fortunes of copper are on the upswing due to the aforementioned factors – both in the medium term (China’s renaissance) and the long term (global decarbonization).

The global energy transition also encompasses the galloping demand for electric vehicles.

Rio commented in its Q4 report that lithium carbonate prices remained elevated during the quarter on the back of strong global demand (supported by China) for EVs.

On average a battery electric vehicle (BEV) contains about 83 kg of copper and a plug-in hybrid electric vehicle (PHEV) contains about 60 kg compared with an average of 23 kg in an internal combustion engine car.

CRU analyst Charlie Durant anticipates that total copper demand from the electric vehicle sector could rise to nearly 1.5 million tonnes in 2025 and to 3.3 million tonnes by 2030 (from a mere 500K tonnes this year).

According to estimates, global copper demand may therefore rise to more than 26 million tonnes in 2025 from around 23 million tonnes this year, and much of that growth would potentially come from renewable energy and electric vehicles.

These developments are favourable to Rio’s strength and global presence in the supply of copper.

Global Macroeconomic Turmoil Remains A Persistent Threat

Rio (ASX:RIO) operates in a world that has recently been rocked by the pandemic, the Russia-Ukraine war, runaway inflation, massive rate hikes by central banks, and the resulting apprehensions of a global recession.

While the war in Ukraine continues to pose energy and food security risks, the Rio management has admitted that in China “the end to COVID controls in December and the subsequent wave of COVID cases (could) bring high volatility in the coming quarter, with increased short-term risks of supply chain disruptions and labour shortages.”

Meanwhile, the Eurozone economy is already showing signs of a downturn, as industrial activity has contracted with persistent low demand while inflation remains high.

In the US, the property market is rapidly cooling off after 30Y fixed mortgage rates have doubled from 2021 levels to average 6.33%.

These threats cloud the horizon, though a Chinese economic comeback could make a huge and positive difference.

Interestingly, economic data released January 17 suggested that China may be headed in the right direction with data coming in much ahead of consensus.

• Unemployment rate: 5.5% Actual vs 6% expected
• Industrial Production (YoY) (Dec): 1.3% vs 0.2%
• Retail Sales (YoY) (Dec): -1.8% vs -8.6%
• GDP (QoQ) (Q4): 0.0% vs -0.8%
• GDP (YoY) (Q4): 2.9% vs 1.8%

JPMorgan’s global market strategist Chaoping Zhu said, “We expect to see a sustained economic recovery in 2023 as a result of reopening and policy stimulus.”

Rio Shares (ASX:RIO) are Joined At The Hip With The Chinese Economy

Rio’s fortunes are inextricably linked with the vicissitudes of the Chinese economy and that is a weakness for the company.

China suffers an authoritarian regime that has in recent years been markedly anti-business, hostile even.

The powers that be can arbitrarily impose overnight strictures even at the country level – for example, the unofficial ban on coal imports from Australia.

Also, the repeated threats to centralize iron ore imports and to create alternative sources of supply.

Rio has therefore to tread carefully to manage this factor.

Rio Shares (ASX:RIO) Financials

RIO reported H1-22 results in July last year. The numbers stacked up negatively against the PCP because 2021 was itself a record year.

Rio drew attention to the following macro factors that adversely impacted performance versus H1-21:

• Extended COVID restrictions in China
• The war in Ukraine
• High energy costs presented risk to smelters in the US and Europe
• Inflation and tighter monetary policy affected consumer sentiment
• Higher input costs at iron ore (diesel, labour), aluminium (caustic soda, coke, pitch etc), and copper (labour, consumables, raw materials)
• Lower by-products (gold, moly)

However, on a positive note, iron ore prices were supported by lower shipments from Ukraine and Russia.

Again, aluminum benefited from firm demand in North American construction and packaging and a decline in global inventories.

For copper too, exchange inventories hovered at multi-year lows.

In its production update report for the fourth quarter, the company reported marginally higher production for the Full Year 2022 (compared to 2021) for all its products.

Its 2023 production guidance remains unchanged except copper.

On a Rio Tinto share basis, mined copper production guidance changed from 550 to 600 thousand tonnes to 600 to 655 thousand tonnes reflecting the company’s increased ownership in the Oyu Tolgoi copper mine in Mongolia from 33% to 66%.

RIO will publish its Full Year results 2022 on February 22, 2023.

Rio Shares (ASX:RIO) Valuation

We will compare Rio shares to BHP and Anglo American, both of which are major global commodities and mining players.

Metric	Rio Tinto (ASX:RIO)	BHP Group (ASX:BHP)	Anglo American plc (LON:AAL)
Price/Earnings (TTM)	7.13	8.54	7.46
Price/Free Cash Flow (TTM)	8.43	6.64	7.42
Debt/Equity (MRQ)	25.43%	40.6%	46.49%
Operating Margin (TTM)	39.48%	50.36%	35.74%
Dividend Yield (5YA)	8.39%	7.96%	4.15%

From the table, at the current RIO share price, it is clear that RIO shares outperform both rivals on Price/Earnings, Debt/Equity, and Average Dividend Yield.

Its operating margin is in the middle, while it is the more expensive in terms of Price/Free Cash Flow.

Rio Shares (ASX:RIO) are a Great Play On Resources With A Solid Dividend Yield

Commodities are an excellent alternative to the traditional 60:40 (bond/stock) portfolio that has been stood on its head in recent times due to the pandemic, inflation and rate hikes.

However, though the average investor may make a commodity facing investment through an ETF or mutual fund, they need to contend with the volatility of the sector.

It might be preferable, therefore, to buy a stock in a well-managed mining company that contains the most important metals and minerals in its product portfolio.

Rio shares are well-positioned to address the growth demand for steel in Asia through its extensive iron ore business.

The company will also benefit immensely from the anticipated deficit in global copper supply arising from the energy transition and decarbonization.

Furthermore, if a resource-facing stock comes at a decent P/E and a good dividend yield, such as RIO shares at the current Rio share price, the investment checks the right boxes.

Note that Rio continued to pay dividends regardless of the upheavals from the pandemic and subsequent economic and geo-political turmoil.

Investors should consider Rio shares (ASX:RIO) as a valuable resource-based investment that could pay off in spades in the long term.