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Iron ore bulls are thin on the ground these days – as are those who want to drill for big iron ore miners like Rio Tinto. However, the future for the Anglo-Australian group is not as bleak as it may seem.
And Rio isn't alone in generating a little excitement. Mining as a whole is going through the dismal end of the commodity cycle. CEO Jacob Stasholm successfully stabilized the group after it dynamited the sacred rock shelters of indigenous tribes in 2020. But as Rio prepares to succeed Stasholm over the next two or three years – not least to promote potential candidate Bold Bataar – the remaining headwinds are turning For the worse. It's all very clear.
The main reason is Rio's reliance on iron ore, which in 2023 accounted for more than 80 percent of its EBITDA. The metal is currently going through a difficult time, falling by almost a quarter since the beginning of the year to reach $104 per ton. China's faltering and overbuilt real estate sector is not helping sentiment. In the long term also, demand is expected to remain roughly constant as increasing steel requirements will be largely met by increased availability of scrap.
Even taking into account the natural depletion rates of existing mines, this is not a market that can withstand significant supply additions. But that is exactly what you are experiencing. The Simandou project – part-owned by Rio – is expected to come online this year and, at peak, add perhaps 15 per cent to the seaborne iron ore market, according to Ben Davies of Librom. This will lead to lower iron ore prices.
This helps explain why Rio makes inspections so cheap, even in the context of a stagnant mining sector. It trades at 4.5 times EBITDA, according to Goldman Sachs estimates, compared with a sector average of 5.5 times.
However, investors may be underestimating the rate at which Rio is developing. Its capital employed by sector arguably provides a better guide to the group's future commodity footprint. On this basis, its $21 billion copper assets are larger than its iron ore business. This reflects Rio's $15 billion investment in the giant Oyu Tolgoi copper mine in Mongolia, where production is just starting to ramp up.
While it's hard to get excited about iron ore, copper has a lot more luster. A key feature of all things energy transition is that demand is expected to nearly double by 2040. Supply shocks are expected along the way, with futures prices for delivery later this year rising to a record premium compared to today's price. Rio's increased exposure could add some color to its stock story.
camilla.palladino@ft.com
