Why Rio Tinto Group (RIO) Is An Undervalued Opportunity

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Rio Tinto Group (NYSE: RIO) is in the mining and commodity processing business worldwide, but perhaps the most important material it offers is iron ore. RIO has the largest portfolio of iron ore assets with 16 mines. Demand for this raw material is expected to grow worldwide at a CAGR of 3.7% between 2022 and 2026 to reach 2.7 billion metric tons.

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RIO shares have fallen low enough for the company to be considered undervalued. The company is currently listed at 39% below MarketBeat consensus price target with a low P / E ratio in relation to its historical levels and that of its companies in the metal and mining industry. Its current P / E is 6.41 compared to the industry’s P / E ratio of 9.4.

RIO shares have fallen 8.59% YTD due to broader stock market sales and the prospects for iron ore. China buys 70% of the world’s sea-transported iron ore it uses to produce steel for its construction and critical real estate projects. These projects were suspended while China continued its zero-covid policy, but there are indications that these brakes on the country’s production are shrinking and that it will continue to take steps to stimulate its struggling economy and important sector. real estate.

China’s real estate market is recovering

A bullish sign for RIO is that China’s real estate market is showing signs of recovery after reaching its bottom. 50% of house prices in China’s first and second tier cities recently recorded higher selling prices. This rebound was led by officials who eased covid-related measures and due to the accumulated demand for properties that could not be met due to covid restrictions. Indices following China’s real estate market also rose, with the CSI Real Estate index up 6% and Hong Kong’s Hang Seng property index up 1%. Although China’s real estate market will need time to recover, its trajectory is currently on the rise, which will stimulate demand for imported iron ore in the country for additional projects.

The impressive financial position of the Rio Tinto group

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

The bottom line

While RIO is unlikely to benefit from maximum iron ore demand in China in the foreseeable future, there are indications that China is quickly trying to restart its troubled economy due to the COVID-19 blockades. . China’s real estate sector has bounced from below and new demand for projects could likely remain the same. Therefore, RIO is in an advantageous position for new investors to join.

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