Shares of Rio Tinto Group RIO have been in the red territory for a while now, having declined around 16% over a year. The stock is currently hovering near its 52-week low. Shares closed at $58.84 on Friday, just 2% higher than its 52-week low of $57.85 hit in the previous trading session.  

RIO has, however, fared better than the industry's 18.2% drop but lagged the Basic Materials sector’s 8.2% decline. The S&P 500 has moved up 23% in the same timeframe.

RIO Stock's 1 Year Price Performance

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RIO Stock Trades Below Moving Averages

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The RIO stock is trading below its 50-day and 200-day moving averages. The 50-day SMA has been below the 200-day SMA since July 2024, indicating a bearish trend. This reflects the market skepticism about the stock's prospects.

Given the significant pullback in RIO’s shares, what should be your next move? Should you accumulate shares, hold positions or book profits? Before arriving at any decision, let us explore Rio Tinto’s underlying fundamentals.

What is Weighing on Rio Tinto?

RIO Expects Lower Copper Production: In the second quarter of 2024, a highwall movement at Kennecott limited the company’s ability to access the primary ore. Rio Tinto had to supplement feed to the concentrator with lower-grade stockpile ore. This is likely to have impacted copper production by approximately 50,000 tons in 2024 and the company guided copper production for fiscal 2024 to be near the lower end of the earlier stated 660-720 kt. This suggests year-over-year growth of 6%, lower than the previously mentioned 6-16%.

RIO cautioned that this will continue to restrict ore deliveries from the primary ore face, and impact mined copper production in 2025 and 2026.

Iron Ore Production in 2024 to Dip 0.4% at the Midpoint: Rio Tinto expects Pilbara iron ore shipments (100% basis) to be 323-338 Mt in 2024. The range indicates a 0.4% year-over-year dip at the mid-point. The company expects SP10 levels, which include other lower-grade products, to remain elevated until replacement projects are delivered.

Reduced Rate at Gladstone to Impact Alumina Output: Alumina production is anticipated between 7 Mt and 7.3 Mt (previously 7.6-7.9 Mt) for fiscal 2024. This indicates a decline from the reported output of 7.5 Mt in 2023 as the Gladstone operations continue to operate at reduced rates following a fire that impacted a third-party gas pipeline. Aluminum production is anticipated to be 3.2-3.4 Mt, whereas it produced 3.3 Mt in 2023.

Costs to Weigh on Rio Tinto’s Near-Term Margins: Pilbara Iron ore unit costs are projected to be in the upper half of $21.75-$23.50 per ton for 2024, suggesting growth from the $21.50 per ton reported in 2023. This reflects the increased work effort in the mines, and inflation in the costs of labor and parts in Western Australia. Tightness in its key labor markets continues to lead to higher costs. However, copper unit costs are expected at $1.40-$1.60 per pound due to higher volumes at Oyu Tolgoi, whereas it reported $1.95 in 2023.

Weakness in Iron Ore Prices Acts as Woe for Rio Tinto: Iron Ore prices have declined 29.4% in a year due to the weak demand in China amid the prolonged property crisis. Prices are currently at $98 per ton lately, as Chinese steel mills have been cutting production in response to weaker demand and shrinking profit margins. Steel output is expected to decline further throughout the year.

Downward Trend in Rio Tinto’s Earnings Raises Concerns

RIO reported revenues of $54 billion in fiscal 2023, 3.5% higher than the 5-year average. However, underlying earnings of $11.8 billion were 15% lower than its 5-year average and underlying EBITDA of $23.9 billion marked a 10.2% decline from the 5-year average.

Lower production, weak iron ore prices and higher costs are expected to impact Rio Tinto’s fiscal 2024 results. The Zacks Consensus Estimate for 2024 earnings is pegged at $6.38, suggesting a year-over-year dip of 12%.

RIO Witnesses Downward Earnings Estimate Revisions

The Zacks Consensus Estimate for Rio’s earnings for 2024 and 2025 has undergone negative revisions over the past 60 days.

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Find the latest earnings estimates and surprises on Zacks Earnings Calendar.

Analyzing Rio Tinto’s Growth Prospects

Balanced Capital Allocation Strategy: Rio Tinto has a total debt-to-total capital ratio of 0.20, lower than the industry’s 0.26. Its financial strength allows it to simultaneously invest in growth projects and maintain shareholder returns. Notably, RIO’s current 6.00% dividend yield is higher than the industry’s 4.06%.

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Rio Tinto continues to earmark $10 billion for capital expenditure per year. This includes $7 billion to be spent on existing projects, high-returning replacement projects and decarbonization efforts. Growth capex is estimated at up to $3 billion per year.

Solid Project Portfolio: Rio Tinto has a robust portfolio of projects with activity in 18 countries across eight commodities in the early exploration and studies stages. Simandou (iron ore) and Oyu Tolgoi (copper) are the primary growth projects. The high-grade Simandou project is set for its first iron ore production at the end of 2025 and will ramp up to 60 million tons by 2028.

Oyu Tolgoi is ramping up to deliver 500 kt per year of copper from 2028 to 2036. Rio Tinto is investing in growth in the Pilbara to raise its mid-term capacity of 345 to 360 Mtpa (100% basis), subject to delivery of the next tranche of replacement mines.

RIO plans to deliver around 3% of compound annual growth in copper equivalent production from 2024 to 2028 from existing operations and projects.

Acquisitions to Boost Portfolio: In 2022, RIO acquired the Rincon lithium project in Argentina.  On Dec. 13, 2024, RIO announced that it would invest $2.5 billion to expand the project. Rincon’s mine life is expected to be 40 years, with construction of the expanded plant scheduled to begin in mid-2025, subject to permitting.

In 2023, Rio Tinto acquired a 50% equity stake in the Matalco business securing a leading position in the rapidly growing North America recycled aluminum market. The demand for recycled aluminum in the United States is projected to increase more than 70% from 2022 to 2032, driven by the transportation, construction and packaging sectors.

RIO’s proposed acquisition of Arcadium Lithium has been cleared by the Committee on Foreign Investment in the United States. It is now subject to investment screening approvals in Australia, Canada and Italy, as well as other closing conditions. The transaction is expected to close in mid-2025.

Rio Tinto is working on building its lithium portfolio to capitalize on the rising demand for batteries and electric vehicles. Arcadium Lithium, with its top-tier assets, a wide range of products, focus on innovation, flexible network and solid growth plan, will play a key part in Rio Tinto’s growth plans.

While this is a good long-term strategy, the ongoing decline in lithium prices is concerning. After a 20% slump in 2024, lithium prices have continued to decline this year amid robust supply growth in key producing countries.

Long-Term Outlook for Commodity Prices Bodes Well for RIO

Growth in world steel production, spurred by urbanization, will fuel the demand for iron ore and support its prices in the long term. Copper prices will be supported by demand in the electric vehicle market and renewable energy investments. Despite the ongoing weakness, considering lithium is a critical mineral in the global transition to clean energy, its long-term fundamentals are solid.

Valuation Looks Attractive for RIO Stock

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Rio Tinto trades at a forward price-to-earnings multiple of 9.2, lower than the industry's 12.13.  The company is also trading at a discount compared with BHP Group BHP, FreeportMcMoRan FCX and Teck Resources TECK, which are trading at 11.19, 20.39 and 24.78, respectively.

How Should Investors Play the RIO Stock?

RIO’s robust portfolio of growth projects, acquisition strategy and solid financial health bode well for long-term growth. However, with declining earnings trends, weak production guidance, inflated costs, a downtrend in iron ore prices and downward revisions in earnings estimates, it is not advisable to buy the dip in this Zacks Rank #5 (Strong Sell) stock.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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