Why Rio Tinto Group (RIO) is an Undervalued Opportunity

Rio Tinto Group (NYSE:RIO) is active in mining and processing raw materials around the world, but arguably the most important material it supplies is iron ore. RIO has the largest portfolio of iron ore assets with 16 mines. Global demand for this commodity is expected to grow at a CAGR of 3.7% between 2022 and 2026 to reach 2.7 billion tons.

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Shares for RIO have fallen so low that the company can be considered undervalued. The company is currently trading 39% below the MarketBeat consensus price target with a low P/E ratio compared to its historical levels and those of its peers in the metals and mining industries. The current P/E is 6.41 compared to the industry’s P/E ratio of 9.4.

Shares of RIO are down 8.59% YTD due to the broader stock market sell-off and the outlook for iron ore. China buys 70% of the world’s overseas iron ore that it uses to produce steel for its construction and critical real estate projects. These projects were shelved as China continued its zero-covid policy, but there are signs that these restrictions on the country’s production are easing and it will continue to take steps to boost its struggling economy and its all-important real estate sector.

Chinese real estate market is recovering

A bullish sign for RIO is that the Chinese real estate market is showing signs of recovery after bottoming out. 50% of house prices in China’s first and second-class cities recently recorded higher asking prices. This uptick was led by officials easing covid-related measures and pent-up demand for real estate that could not be met due to covid restrictions. Indices tracking the Chinese real estate market also recovered, with the CSI Real Estate Index rising 6% and the Hong Kong Hang Seng Properties Index rising 1%. While it will take some time for the Chinese real estate market to recover, it is currently on an upward trajectory, which will boost demand for iron ore imported into the country for additional projects.

Impressive financial position of Rio Tinto Group

Aside from the company’s historically low stock price and the easing of restrictions in China, there are other aspects of RIO that make it an undervalued stock choice. The company currently has no debt on its books and has growing revenues and profits. RIO has free cash flow of $17 billion with free cash flow of $10.94 per share. It also has a number of projects underway to diversify itself from iron ore, including copper mines in Mongolia and Arizona, as well as a lithium mine in Serbia. For FY 2023, RIO is expected to have a share price of $81.50 given strong demand for its commodities.

It comes down to

While RIO is unlikely to benefit from China’s spike in iron ore demand for the foreseeable future, there are signs that China is trying to quickly restart its struggling economy due to COVID-19 lockdowns. China’s real estate sector has bounced back and new project demand is likely to follow. RIO is thus in a favorable position for new investors to come on board.


This post Why Rio Tinto Group (RIO) is an Undervalued Opportunity was original published at “https://www.entrepreneur.com/article/430620”

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