Rio Tinto Upgraded, But Still Expensive

Despite the upgrade, Rio Tinto remains overvalued. We think the market remains too bullish on iron ore in particular, and this is the company’s dominant source of earnings

Mathew Hodge 24 May, 2016 | 2:05PM
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Analysts are raising the fair value estimate for Rio Tinto (RIO) to £15.40 per share from £15 after incorporating higher near-term earnings as a result of the rally in commodity prices in 2016, taking into account the time value of money, and making some minor changes to the model after factoring in the lower Australian dollar to US dollar exchange rate.

Despite the upgrade, Rio Tinto remains overvalued. We think the market remains too bullish on iron ore in particular, and this is the company’s dominant source of earnings. The unchanged no-moat rating reflects overinvestment during the boom. Unprecedented pro-cyclical investment has bloated the asset base and destroyed Rio Tinto's cost advantages. Our unchanged high fair value uncertainty rating reflects operating leverage, cyclicality, and reliance on iron ore.

Profitable through the Commodity Cycle

Rio Tinto is one of the world's biggest miners, along with BHP Billiton, Brazil's Vale, and U.K.-based Anglo American. Above-average assets relative to peers and a solid operating record make Rio Tinto one of the few miners that are profitable throughout the commodity cycle. Geographic and product diversification, however, provide only modest benefit. Most revenue comes from the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rio Tinto PLC4,788.50 GBX-0.87Rating

About Author

Mathew Hodge  is Morningstar's director of equity research, Australia & New Zealand.

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