Why Rio Tinto Group (RIO) is an undervalued opportunity

Rio Tinto Group (NYSE: RIO) is in the business of extracting and processing raw materials across the globe, but iron ore is perhaps the most important material it delivers. RIO has the largest portfolio of iron ore assets with 16 mines. The demand for this raw material is expected to grow globally at a CAGR of 3.7% between 2022 and 2026 to reach 2.7 billion metric tons.

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

Shares of RIO have fallen 8.59% year-to-date due to the sell-off in the stock market as well as the outlook for iron ore. China buys 70% of the world’s maritime iron ore which it uses to produce steel for its construction and critical real estate projects. These projects have been put on hold as China pursues its zero covid policy, but there are signs that these brakes on the country’s production are easing and that it will continue to take steps to stimulate its struggling economy and sector. very important real estate.

China’s real estate market rebounds

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-tier cities have recently seen higher asking prices. This rebound was led by officials easing covid measures and due to pent up demand for goods which could not be met due to covid restrictions. Indices that track the Chinese property market also rebounded, with the CSI Real Estate Index up 6% and the Hong Kong Hang Seng Properties Index up 1%. Although it will take some time for the Chinese real estate market to recover, its trajectory is currently on the upswing, which will boost the demand for iron ore imported into the country for additional projects.

The impressive financial situation of the Rio Tinto group

Besides the company’s historically low share price and the easing of restrictions in China, there are other aspects of RIO that make it an undervalued stock pick. 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 away from iron ore, including copper mines in Mongolia and Arizona as well as a lithium mine in Serbia. For fiscal 2023, RIO is expected to have a stock price of $81.50 given strong demand for its commodities.

The essential

While RIO is unlikely to benefit from China’s spike in iron ore demand for the foreseeable future, there are signs that China is rapidly trying to restart its struggling economy due to COVID-19 lockdowns. China’s real estate sector rebounded from the bottom and new demand for projects could likely follow suit. RIO is therefore in an advantageous position to welcome new investors.

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