Sector Concerns Have Hammered Rio Tinto’s Value - Is Now The Time To Buy?

6th May '22 by Megan Boxall

14 comments 3582 reads

The phenomenal cash flows of companies in the mining sector have failed to prop up their valuations in recent years. Sky high commodity prices have seen the miners rake in cash, but their share prices remain resolutely in the doldrums. After all, who wants to park their money in a company which continues to drill minerals out of the earth, when the rest of the world is intent on preserving it?

The issue with this altruistic theory is that to create the technologies that will protect the earth - batteries for electric cars, panels for solar farms, turbine components and the like - we need to use the earth’s minerals. And we need the miners to extract them for us.

Rio Tinto (LON:RIO) has image issues on top of those which apply to the entire sector. Drilling into a sacred aboriginal site in Australia was not sensible, nor was the PR horror-show that followed. The company is also struggling with regulatory issues in its newly acquired lithium mine in Argentina, while its exposure to China is worrying amid the country’s continued lockdowns.

Indeed, added to the economic fears that are encircling commodities companies, it’s hardly surprising that Rio’s valuation is languishing at the moment. The company is trading on a forward price to earnings ratio of 5.8x - below its five year average of 9.0x. But the allure of a cheap price tag can be dangerous for investors. Before leaping into value stocks in a troubled market, it's worth making sure the fundamental investment case stacks up.

Ditching principles in the hunt for discounts

Investors' hunt for quality companies at reasonable prices has not been especially fruitful of late. The allure of innovative companies, coupled with a relentless march towards ESG investing has lifted huge swathes of the market, while old-world stocks have remained in the doldrums, regardless of their inherent values. Thus, most of the companies which aren't trading on eye-watering multiples are those whose investment case is clouded by something that could be out of their control. That problem is shown by the output of our quality/value screen which churns out companies which hit the following criteria:

QV Score more than 80 - meaning they are among the top 20% of companies on the Stockopedia quality and value scale
5yr average return on capital employed (ROCE) of more than 10%
5yr average operating margin of…

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JohnEustace

6th May '22

How would you envisage the economic uncertainty surrounding the company to ever clear up? (I hold)

Silver Moon

That will be the day when economic uncertainty surrounding ALL miners clears up. I do hold Rio Tinto (LON:RIO) and appreciate its dividends.

FreakNomad

I feel that miners will be rerated. The stuff they dig from the ground is essential. Even if China's economy wobbles, I think there might be a big rebuilding project somewhere in eastern Europe. Whether TPTB are making iPhones or cruise missiles, minerals and things are going to be vital. Yeah, so I like Rio Tinto (LON:RIO) .

GloucesterBob

Rio Tinto (LON:RIO) (I Hold) with a divi north of 10%, hold them for 10 years and you have received your initial stake back.

Also tipped in this weeks Shares Magazine, they believe Iro Ore (and Aluminium and Copper) output will improve this year.

D P J Bis

I bought RIO last November at a discount price planning on adding more, they're quality and they're paying 10% dividend min / year. I am keeping them for the long term.

DaviStoVest

In highly uncertain times, there is a lot to be said for investing in stocks that have a strong record of dividend delivery. More strategically, there is still a decent case to argue that we are at the start of a new commodities supercycle.

Rio Tinto (LON:RIO) is surely going to offer a bumpy ride but I think it's a good idea to jump on and try to enjoy it. I hold.

JCPr

I accept that Rio Tinto (LON:RIO) are very cyclical and a low P/E is generally quite justified, but I also believe very few appreciate just how much drilling of materials out of the earth is really necessary for the green revolution. In my opinion at least, this level of demand is going to be a strong structural driver for miners.

John Gibson

It’s better than that,

7% reinvested double in 10 years.
10% doubles in 7.5 years.

DazJackson007

I’ve held Rio since November and also like the divi. It’s a bit of a rollercoaster and maybe a little to iron ore focused, particularly with the current policies in play in china. There is some risk but I personally think that a commodities super cycle is pretty much essential for the green revolution so I’ll stay invested with a basket of other miners and ETF’s to spread the load.

Logical David

7th May '22

Yes thats right. Its called 'The Rule of 72".

Boon

8th May '22

Key risk with Rio Tinto (LON:RIO) is a deep global recession, thereby reducing metals demand. But IMO if economies (USA, China) start to go into reverse, you can bet that politicians will do the tried and tested "infrastructure boost" by announcing large scale public building programmes. Because every government has done that in the past when growth has wobbled, why would it be any different in 2022?

In addition, there are some tailwinds for this year:

production wobbles in Pilbara means iron ore output comparables this year should see a good growth in volumes
Copper mine expansion in Mongolia sorted, progressing well, adding to revenue growth in 2024 onwards
SP took a hit last year when Serbia stopped lithium mine. But talks have now resumed. Enough palms just need to be greased for the politicians to say yes, and enough $$ given to the communities

It doesn't take much for sentiment to swing and for this to go from 5400p to 6400p or higher. Combined with the dividend, that would be a nice 20% (capital gains) + 10% (dividend) = 30% return I am expecting within the next 12 months.

(I Hold in the Boon Fund)

jhmtaylor

25th Jun '22

In my opinion, RIO's biggest problem is RIO itself! RIO used to have senior managers in the major locations managing local community relations because good community relations are a pillar of their social license to operate. J S Jacques sacked all of those people, broke the connection and transferred the role to a London-based person, who did create a connection with the communities in which RIO operate. The void was filled by cowboys who thought they could do what they wanted.

The author said, "Drilling into a sacred aboriginal site in Australia was not sensible". But they blew it up with 100s of tons of explosives. The fact that they even contemplated doing that says a lot about the culture and competence of RIO management. The bad PR was inevitable and but the consequences of the original decision will burden the company for at least a decade. RIO has been severely wounded over this incident and the hyenas are circling. It used to be BHP or RIO as the top tier resource companies, now there is only one.

Rio Tinto (LON:RIO) win their appeal for the huge Arizona copper mine, though it will now probably go to the Supreme court for a final decision.

Could do wonders for the share price if it goes through and we may get an uplift on Monday, fingers crossed.

https://www.stockopedia.com/po...

Monty9

27th Jun '22

But against a GBP inflation rate of, say, 10%, that is pretty much standing still..... still quite an achievement in the current environment. Perhaps the biggest risk is if Geopolitics deteriorate in the next years, many of their assets may be at risk.

Sector concerns have hammered Rio Tinto’s value - is now the time to buy?

Ditching principles in the hunt for discounts

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Megan Boxall

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