Rio Tinto – still a commodities giant, but is it getting expensive?

Few companies carry the same weight in global resources as RIO Tinto. As one of the world’s preeminent diversified miners, its fortunes are tied to the backbone commodities of the modern economy – iron ore, copper, and aluminium – making it a critical bellwether not just for the ASX, but for global growth.

Closer to home, RIO’s long-running rivalry with BHP continues to define the Australian mining landscape. The battle isn’t just for tonnes in the ground, but for investor capital and the coveted position as Australia’s premier mining exposure. In recent years, that contest has tilted in BHP’s favour – particularly in iron ore – raising questions about RIO’s relative positioning heading into the next phase of the cycle.

Enter Tim Hillier, Analyst at Allan Gray – a CFA with a background spanning Ernst & Young and PwC. Hillier brings a valuation-driven, long-term lens to resource investing.

RIO’s FY25 result offered a familiar mix: strong earnings leverage to iron ore and copper prices, some question marks around aluminium, and importantly – no major surprises on capital allocation. But with the share price having rallied sharply over the past year, the debate is shifting from operational performance to valuation.

To unpack what comes next, I sat down with Hillier to discuss whether RIO still stacks up – or whether investors are now being asked to pay too much for the same set of assets.

Key Numbers FY25 (US$)

Company:

• Revenue: $57.6 billion (+7% YoY)
• Underlying EBITDA: $25.4 billion (+9% YoY)
• Operating cash flow: $16.8 billion (+8% YoY)
• Underlying earnings: $10.9 billion (flat YoY)
• NPAT: $10.0 billion (–14% YoY)
• Free cash flow: $4.0 billion (–28% YoY)
• Dividend: $6.5 billion (60% payout ratio)
• Net debt: $14.4 billion (vs $5.5 billion)

Divisional highlights:

• Copper production: 883kt (+11% YoY)
• CuEq production: +8% YoY
• Iron ore realised price: US$90/t (–8% YoY) 

Do you currently hold the stock and what is your rating?

Hillier: Yes, we own RIO shares. But after the recent rally, the risk–reward is less compelling than when we first invested.

I don’t really think in terms of simple buy, hold or sell ratings. It’s more of a continuum. Sometimes a stock is obviously cheap or expensive, but most of the time it’s more nuanced – and that’s where RIO sits today.

What matters from the results?

Hillier: The standout is that returns in iron ore and copper are very strong at the moment, largely thanks to commodity prices.

Aluminium looks a bit weaker on first pass – that’s something that needs a bit more work to understand properly.

More broadly, when we look at results, we’re trying to assess operational performance relative to peers over time – not just over a six-month period. We’re also watching closely for any changes in capital allocation priorities, and at this stage, there don’t appear to be any major shifts there.

How do those outcomes affect the outlook?

Hillier: I tend to think more in terms of the medium term rather than one to two years.

RIO used to be the most profitable iron ore producer in Australia, but it lost that position to BHP several years ago. There’s been a slight improvement in that gap, but it still persists – and that’s a bit disappointing.

Being the lowest-cost producer really matters when prices fall, because that’s where cost curve support comes from. So that’s an area to watch.

On the positive side, copper has been well executed. Production has increased over recent years, and that’s now benefiting from higher prices – particularly at operations like Oyu Tolgoi and Escondida.

Aluminium is a business we like structurally, especially given the hydro-powered assets in Canada, which position RIO well on the cost curve.

What should investors be paying attention to as the story unfolds?

Hillier: In the near term, commodity prices are always the biggest swing factor – but trying to predict them is a mug’s game.

Instead, we focus on whether you start to see a supply response. Are new projects being approved? That’s often what leads to the next phase of weaker prices, although the lead times can be long.

The other key factor is capital allocation. One of the more important recent developments was RIO walking away from the potential Glencore merger – we think that was a positive outcome.

There was a lot of talk about synergies, but for companies of that scale, we’re sceptical that those would have been material. In fact, there was a risk the re-rating could have gone the other way over time.

What could you be wrong about?

Hillier: The reality is that most forecasts are wrong – often in both directions. So the goal is to build an investment case that relies on as few assumptions as possible.

Ideally, you’re investing in commodity businesses when prices are low and assets are trading around replacement cost. In that scenario, you don’t need to be right about short-term commodity prices – you just need the business to survive and the cycle to turn.

At what price does RIO become attractive?

Hillier: It really comes back to what you’re being asked to assume.

At lower prices – say around $100 where RIO traded last year – you could justify the valuation based on cost curve support and replacement value of assets, particularly in iron ore and copper.

At higher prices, like around $170 today, you’re being asked to assume much stronger margins and higher commodity prices – and that introduces a lot more uncertainty.

Ultimately, the higher the share price, the more you’re relying on assumptions about commodity prices – and that’s not something we think we’re particularly good at forecasting.