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Sin Stock Special: Rio Tinto is Undervalued

Analysts have reduced the 'fair share price' of Rio Tinto due to a stronger pound and moving commodity prices - but the mining giant is still significantly undervalued 

Mark Taylor 17 October, 2013 | 5:30PM

Read more on ethical and sustainable investing in Morningstar's Ethical Investing Week 2013.

We have decreased the share price at which we consider Rio Tinto (RIO) to be fairly valued estimate from £42.50 to £41.65, factoring in the stronger British pound. We only recently reduced our fair value estimate from £46.65 after revisiting capital and operating cost forecasts and consequently reassessing Rio's growth prospects. Iron ore, copper and aluminium remain the three largest segments for Rio, accounting for a little changed 95% of group fair value. However, the relative weightings have changed considerably. In Rio's case the majority stems from taking a hatchet to the aluminium segment for which we reduced fair value by more than half after cutting growth projections and increasing operating costs. Aluminium's contribution to fair value falls from 31% to 15%, a level more in line with copper's importance. Our copper fair value estimate is unchanged and its weighting increases marginally by virtue of the pie shrinking overall. Similarly, the iron ore segment fair value is unscathed, though weighting increases from an already high 56% to a dominant 70% share. Rio is by and large an iron ore story.

The 22% reduction in our Rio fair value chiefly reflected decline in the aluminium segment, the second-largest contributor to fair value overall. The contribution from most of the lesser segments, including energy coal, rises marginally with higher margins factored, but these are near immaterial to Rio's earnings. Copper and iron ore fair values are stable.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BHP Group PLC1,737.80 GBX0.56
Rio Tinto PLC4,922.50 GBX0.43
Vale SA ADR14.73 USD3.01

About Author

Mark Taylor  is an equity analyst at Morningstar.

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