Can Rio Tinto Catch Up With Rivals?

The Australian miner has underperformed peers so far this year, down nearly 6% YTD, but is there a chance of a revival?

Iron Ore Roller Coaster Ride Impacts Share Price

Since the start of the pandemic, iron ore prices have been on a roller coaster ride as demand from China has slowed down. This has been especially true with Australian production, as it relies on imports from China. Politics has had an impact, with tensions between the two countries curtailing imports. But now, it appears that the relationship is thawing, with the latest reports saying that Prime Minister Anthony Albanese had been invited to Beijing to meet with President Xi Jinping. This came after China announced it would no longer place limits on coal imports.

69% of Rio Tinto's underlying EBITDA comes from iron ore, which saw a 33% drop compared to the prior year due to lower prices. Rio Tinto's second largest money-maker is aluminum, which
saw a spike in prices with the onset of the war in Ukraine, but then prices dropped dramatically, impacting Rio Tinto's underlying profitability. Copper production has been affected by ongoing drought conditions in Chile, impacting gold production. Rivals such as Wheaton and Barrick have faced challenges, but having a larger percentage of income from gold and silver mining, they have been able to take advantage of the rising prices of precious metals. The former is up nearly 30% YTD, and the latter about 15%.

La Granja Offers Better Chance to Compete with Rivals

Rio Tinto hasn't remained idle in the current circumstances and recently signed an agreement with First Quantum to jointly develop the La Granja mine in Peru, which potentially holds the world’s largest undeveloped copper deposits. It's not just that copper is expected to be pivotal in the global energy transition in the coming decades, but typically copper deposits coincide with substantial gold and silver findings, which could help Rio Tinto move towards diversifying its production base and have a better chance at competing with rivals.

The need for diversity has come under particular scrutiny since March after a series of reports that China was looking to curb rising ore prices and prevent traders from stockpiling ore. China's post-covid reopening was expected to boost demand for iron ore, but the rebound hasn't been shaky at best, and the housing sector remains in trouble. Rio Tinto will hold its AGM tomorrow, during which is expected to announce a new 125M share buyback. The company announced a final dividend of 225 cents per share on 22 February 2023, 53% lower than its 2021 payout of 417 cents.

Has The Flag Pattern Ended?

The decline in the share price of Rio Tinto might have ended or is near to put a low in as a wedge. The next major level of support below the local low lies at the 5k GBX, and lower down, there is a gap to fill by 4680 GBX. With a flag pattern likely completed, if bulls can reclaim the near-term ceiling of 5500 GBX, it might kick the door wide open to the January peak of 6400 GBX. Interim resistance stands at 5880 GBX, yet another gap formed on the stock's descent.

Key takeaways

Rio Tinto has faced challenges due to weaker metal prices it produces. In comparison, rivals Wheaton and Barrick have seen their share prices rise alongside rising gold and silver prices. To combat these issues, Rio Tinto has turned to diversify its production base by signing an agreement with First Quantum to jointly develop the La Granja mine in Peru, which potentially holds the world’s largest undeveloped copper deposits. Rio Tinto is also expected to announce a new $125M share buyback at its AGM tomorrow.