Why Rio Tinto Group (RIO) Is An Undervalued Opportunity
July 01, 2022 at 05:00 AM EDT
Rio Tinto Group (NYSE: RIO) is in the business of mining and processing commodities across the world, but perhaps the most important material it delivers is iron ore. RIO has the largest portfolio of iron ore assets with 16 mines. The demand for this raw material is set to grow worldwide at a CAGR of 3.7% between 2022 and 2026 to reach 2.7 billion metric tonnes.
Shares for RIO have fallen low enough that the company can be considered undervalued. The company is currently trading 39% below the MarketBeat consensus price target with a low P/E ratio relative to its historical levels and that of its peer companies in the metal and minings industry. Its current P/E is 6.41 compared to the industry’s P/E ratio of 9.4.
Shares of RIO have slumped 8.59% YTD due to the broader sell-off in the stock market as well as due to the outlook of iron ore. China purchases 70% of the world’s seaborne iron ore which it uses to produce steel for its construction and critically important real estate projects. These projects were put on hold as China pursued its zero-covid policy, but there are signs that these curbs on the country’s production are easing and that it will continue to take steps to stimulate its struggling economy and its all-important real estate sector.
China’s Real Estate Market Rebounds
A bullish sign for RIO is that China’s real estate market is showing signs of recovery after it reached its bottom. 50% of house prices in China’s first and second-tier cities recently recorded higher asking prices. This bounce was led by officials easing covid-related measures and due to the pent-up demand for property that was unable to be met due to covid restrictions. Indexes that track China’s real estate market also rebounded, with the CSI Real Estate Index up 6% and the Hong Kong Hang Seng Properties index up 1%. Although it will take some time for China’s real estate market to recover, its trajectory is currently on the upside, which will stimulate the demand side for iron ore imported into the country for additional projects.
Rio Tinto Group’s Impressive Financial Positon
Aside from the company’s historically low stock price and the easing of restrictions in China, there are other aspects of RIO that make it an undervalued stock pick. The company currently has no debt on its books and has growing revenues and earnings. RIO has a free cash flow of $17B with $10.94 free cash flow per share. It also has a number of projects underway to diversify itself from iron ore, including copper mines in Mongolia and Arizona as well as a lithium mine in Serbia. For FY 2023 RIO is expected to have a share price of $81.50 given the strong demand for its commodities.
The Bottom Line
Although RIO is unlikely to benefit from the peaked demand for iron ore in China over the foreseeable future, there are signs that China is rapidly attempting to restart its struggling economy due to COVID-19 lockdowns. China’s real estate sector has bounced from the bottom and new demand for projects could likely follow suit. RIO is therefore in an advantageous position for new investors to get onboard.