Rio Tinto’s share price is down around 16% this year, trading around the A$85 level. While that’s a dip, it’s better than rivals like BHP Billiton [BHP] (-30%).
Rio Tinto [RIO] is the world’s biggest iron ore producer, and the high price of iron ore has sustained shareholder confidence. With demand from China returning, the miner could see its share price go higher. But the nagging concern for investors will be whether this is enough to sustain its business in the midst of a global pandemic.
What happened in Rio Tinto’s latest update?
Rio Tinto's last update saw iron ore production increase 2.3% to 77.8 million tonnes. Output for aluminium, alumina and bauxite is also on track. However, the miner cut its mined and refined copper outlook.
According to Rio Tinto, demand from China for raw materials is starting to return, a potential boon for Rio Tinto’s share price investors. However, global demand remains weak and Rio has cut capital expenditure. A good move according to CMC analyst David Madden:
"Seeing as metal prices are likely to remain relatively weak in the short-to-medium term, it is prudent [for Rio Tinto] to curtail its expansion plans."
Why is China important to Rio Tinto?
China is Rio Tinto's top customer, accounting for $25 billion worth of revenue. Any lack of demand from China would be a big issue for company performance, and Rio’s ailing share price.
Valuation of Rio Tinto's revenue coming from China
“From what we are seeing, China is restarting. And as far as we are concerned, China is demanding lots of raw materials and we are doing everything we can to deliver those products,” said Jean-Sébastien Jacques, Rio Tinto’s CEO.
Yet data from China shows that its economy has shrunk 6.8% in the first 3 months of the year. Significantly, this ends an incredible four decades of growth. To kick-start things, Jacques is confident that China will implement a stimulus package:
“What we don’t have full visibility of today is around the type of stimulus package China is going to put in place. Will it be similar to the one put in place after the global financial crisis? I’m not sure. But I have no doubt there will be one,”
Any stimulus package could see money pumped into infrastructure projects that need a hefty supply of raw materials; positive news for Rio Tinto’s share price investors.
“What we don’t have full visibility of today is around the type of stimulus package China is going to put in place. Will it be similar to the one put in place after the global financial crisis? I’m not sure. But I have no doubt there will be one” - Jean-Sébastien Jacques, Rio Tinto’s CEO
Where do iron ore prices come in?
Iron ore is a key ingredient in steelmaking, which China needs to build with. With prices for the ore averaging out at US$88 per tonne this year and with demand high, Rio Tinto is making a fat profit given that it costs the miner around US$14 to extract it.
But will prices remain high? Westpac, for one, is sceptical. The bank is estimating $65 per tonne this year. Westpac notes that demand from China is unlikely to keep prices high in the long-run. Global demand will also weaken due to the coronavirus. If this metal does lose its value, this will put pressure on Rio Tinto's earnings.
|PE ratio (TTM)||9.44|
|Quarterly Revenue Growth (YoY)||8.90%|
Rio Tinto share price vitals, Yahoo Finance, 22 April 2020
What do analysts expect from Rio Tinto?
Analysts have pinned a A$60.42 share price target on Rio Tinto. Hitting this would see a 29% downside on the current share price.
Among the bears is Barclays Capital. Last week it slashed its share price target for Rio Tinto and reaffirmed its Underweight rating. Barclays Capital's new target suggests that there could be as much as a 13% sell-off.
On the side of the bulls is BMO Capital. Analysts there recently upgraded the miner from Market Perform to Outperform. In a note to investors, BMO analyst Edward Sterck said that the stock prices in an iron ore value below its current levels.