Rio Tinto: Big Picture Remains Unchanged

seekingalpha09-27

Multicommodity miner Rio Tinto (RIO) has seen a price uptick in recent weeks, but going by its fundamentals and market multiples, it's unlikely to continue.The company's big focus, iron ore, is ...

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While metals like copper and aluminium can stabilise the financials, their uptick isn't enough for rapid improvements.RIO's market multiples don't justify further price rise either, though its dividend yield still looks good for investors targeting a sustainable passive income.   BeyondImagesAustralian multicommodity miner Rio Tinto (NYSE:RIO) has seen an encouraging price trend in recent weeks, resulting in a 5% rise in the past month, after being essentially in free fall since mid-May. The stock is even up by over 6% since the last time I wrote about it in July. RIO still underperforms the S&P Metals & Mining Select Industry Index, though. While the index is now up by 5% year-to-date [YTD], RIO is still down by over 9%. Does this mean that there's more upside for it in the foreseeable future? Unlikely. Even with some positive financial developments in H1 2024, the big picture for the company looks weak due to commodity price softness, which is discussed below. Copper balances out iron ore weakness As was expected, the company's results for the first half of 2024 (H1 2024) were underwhelming. That said, it's still encouraging that after seeing a 3% revenue contraction for the full year 2023, Rio Tinto reported a 1% year-on-year [YoY] increase in H1 2024. It's even more notable considering that iron ore, which brings over half the revenues, continued to weaken on price weakness. The numbers got an uplift from copper's strong performance, with a 26.4% YoY revenue increase for the metal, along with support from aluminium. Both copper and aluminium got a boost from increased prices as well as a pickup in production. In fact, copper's 66.7% YoY underlying EBITDA growth was significant enough to drive a 3% YoY increase in the total figure too. This is worth highlighting considering that the company saw a 9% contraction in the figure for the full year 2023.   Source: Rio TintoWhat the rest of 2024 holds Still, the improvement isn't strong enough to merit any dramatic change in outlook for Rio Tinto. Analysts’ estimates on Seeking Alpha indicate a revenue decline of 1.5% this year and reflect an EPS contraction of 1.4%. Underlying this forecast, is presumably, a continuation of the trends seen in H1 2024. Copper and aluminium uptick to continue Copper prices, which have been on the up and up through this year (see chart below), explaining the commodity's performance in H1 2024, are expected to continue seeing some uptick in Q4 2024 as well. Similarly, forecasts for aluminium prices for Q4 2024 look good too, after the metal has seen a YoY uptick in the year already (see chart below). As a result, it can supplement the growth indicated by copper, especially with regards to profits. While the metal's revenue growth at 3.6% YoY was muted compared with copper's in H1 2024, the rise of 38% YoY in underlying EBITDA was still notable.   Copper Futures (Source: Trading Economics)  Aluminium Futures (Source: Trading Economics)Iron ore's prospects remain weak  However, iron ore will likely continue being a drag on the numbers. From a contribution of 77.1% in total underlying EBITDA for all the operating segments in H1 2023, the share has already dipped to 68.4% in H1 2024, due to a 10% YoY decline in the figure. Continued softening in iron ore prices is the key reason behind this (see chart below), though production also softened a bit as well. The commodity's prospects don't look good either. Goldman Sachs recently slashed its forecasts for Q4 2024 as a fallout of expected oversupply during the quarter. With production expected to remain broadly unchanged from 2023, there's really no upside to Rio Tinto's iron ore revenues for the remainder of 2024.   Source: Trading EconomicsStock metrics RIO's stock metrics are also less favourable compared to two months ago. Its forward non-GAAP price-to-earnings (P/E) ratios are now at 9.46x, higher than the 8.87x the last I checked. The figure is even higher at 9.9x as per my updated earnings estimates. For these forecasts, I've assumed that the revenue declines by 1.5% in 2024, taking a leaf from analysts' estimates, and the underlying earnings margin seen at 21.7%, as seen in H1 2024. No matter how we look at them, though, the P/Es remains higher than the stock's five-year average of 7.84x. This in turn indicates that Rio Tinto's recent price rise is unlikely to continue. The price prospects for 2025 don't look positive either. Analysts expect an accelerated earnings decline, which can be tied to a weaker outlook for copper prices, while iron ore prices are firmly expected to continue declining.   Source: Seeking AlphaNext, the dividend yield has weakened too. Compared to 8% the last time I checked, Rio Tinto's forward dividend yield at 6.4% doesn't look as good either. It's also lower than the stock's five-year average yield of 7.71%. Though, on its own, the yield is still very good, considering that it's way higher than the 1.89% forward yield for the materials sector. And the dividend consistency is a huge positive for RIO too. What next? To reduce the Rio Tinto story in the past months to a single sentence, nothing has changed. It's still hard to see price upside to the stock. The biggest offender continues to be iron ore prices, which are also expected to stay soft for the remainder of the year. Even though copper is a bright spark and aluminium adds its support, that's not enough to notably change the overall financial outcome for the company in 2024. The stock's market multiples look elevated compared with its own past averages as well, no matter how the earnings estimates for this year are sliced. Initial estimates for 2025 don't serve to encourage either, with EPS expected to continue contracting, resulting in an even higher forward P/E. The forward dividend yield is lower than the last I checked as well. On its own, it still looks good, though. So, Rio Tinto can still be a stock to consider for long-term dividend investors. But it's not one for investors looking for capital gains. For this reason, I'm maintaining a Hold rating on RIO. This can change, though, if the company upgrades its production figures appreciably, especially for the next year, or on any unexpected spikes in commodity prices.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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