Rio Tinto

Rio Tinto’s interim 2026 underlying NPAT is 43% up on a year ago, to USD 6.9 billion or USD 4.21 per share, due to higher copper and aluminum prices. It declared a USD 2.11 fully franked interim dividend, also up 43% on an unchanged 50% payout ratio, at the midpoint of its 40% to 60% target range.

Why it matters: The higher dividend is likely why shares are up 4%. Earnings are assisted by a lower-than-expected effective tax rate of 25% for the half compared with previous guidance for around 30%. Management now guides to about 25% for the full year, before returning to around 30% from 2027, with other guidance unchanged. We now assume 26% for the full year, down from 30%, with our 2026 EPS and DPS rising by 5%. Our other estimates are broadly unchanged.

The bottom line: Our fair value estimate remains AUD 125 for no-moat Rio Tinto, with shares expensive. The soaring copper price is likely the main driver. It trades near all-time highs at about USD 6.20 per pound on optimism over rising data center and energy transition demand. This is materially above long-term cost support, which we estimate at around USD 3.80 midcycle from 2030. Higher aluminum prices on supply disruptions caused by the Iran war are also likely another driver, with the iron ore price being broadly stable at about USD 100 per metric ton.

Key stats: Our updated 2026 DPS of USD 4.66 is up 16% on 2025, offering a 4% forward yield at the current share price. Its practice is to target a higher payout in the second half than in the first, and we assume a 55% payout for the full year. Although there is scope for it to be even higher given its balance sheet remains very strong, and the firm has averaged a 60% full-year payout over the last decade.

Between the lines: Stronger prices see copper (36%) and aluminum (20%) comprise more than half of first-half underlying EBITDA compared with around 45% in total last year. Iron ore makes up almost all of the remainder, with lithium immaterial.

We expect Rio to grow volumes in all three of its major commodities over our five-year forecast period to 2030. But with spot prices for all three materially above our respective midcycle assumptions based on estimates of the long-run marginal costs of production, lower prices more than offset, and we forecast a negative 4% CAGR in NPAT over this period.

We forecast its share of copper volumes to increase to about 870,000 metric tons in 2030, from 765,000 in 2025, driven by Oyu Tolgoi underground ramping up to full capacity in 2028. We also expect moderate increases in aluminum volumes.

Pilbara iron ore unit costs are tracking toward the top end of guidance for between USD 23.50 and USD 25.00 per metric ton. We maintain our USD 24.80 estimate, with likely seasonally higher second-half sales volumes likely to broadly offset energy price and currency headwinds. Simandou is currently immaterial, but as it ramps up to full capacity by 2028, together with incrementally higher Pilbara production, we expect 2030 volumes of about 340 million metric tons, from around 290 million in 2025.

We reduce our fair value estimate for Rio Tinto to USD 88 per ADR, from USD 90, due to currency movements since our last update.

We assume iron ore averages about USD 100 per metric ton from 2026 to 2028 based on the futures curve. Based on our estimate of the long-run marginal cost of production, our assumed midcycle price is around USD 75 per metric ton from 2030. Solid demand from China, which accounts for around 75% of the seaborne iron ore trade, is supportive of near-term prices. However, longer-term we expect demand from China to moderate as steel production peaks and starts to decline as its economy moves away from one reliant on fixed-asset investment to a more consumption-based economy. China’s falling population, along with rising scrap-based production, also contribute to reduced demand for iron ore in our view. We also think additional supply is likely, led by Simandou and Vale. Hence, we expect a long-term price substantially below the current spot of around USD 100 per metric ton.

Cuing off the futures curve, our assumed average copper price from 2026 to 2028 is about USD 6.00 per pound. Based on our estimate of the long-run marginal cost of production, we assume a midcycle price of about USD 3.80 per pound from 2030.

In line with the futures curve, we assume alumina prices average about USD 320 per metric ton from 2026 to 2028. We assume around USD 340 per metric ton midcycle from 2030 based on our estimate of the long-run marginal cost of production.

We also assume aluminum prices average about USD 1.50 per pound from 2026 through 2028 based on the futures curve. Based on our estimate of the long-run marginal cost of production, our assumed midcycle price is about USD 0.85 per pound from 2030.

We assume gold averages around USD 4,400 per ounce from 2026 to 2028 based on the futures curve. However, our assumed midcycle price is about USD 2,050 per ounce from 2030. This is based on our estimate of the long-run marginal cost of production.

Our fair value estimate employs a 9.7% cost of equity, reflecting high cyclicality and operating leverage, coupled with moderate financial leverage and modest exposure to higher-risk locales. Our assumed 8.6% weighted average cost of capital reflects a long-run 30/70 debt/equity split, appropriate for a major mining company such as Rio. Our fair value estimate equates to an enterprise value/EBITDA exit multiple in 2030 of 7.5 times.

As a commodity producer, Rio is a price taker and needs low-cost mines with long lives and a low installed capital base to support the longer-term excess returns needed to justify an economic moat. We forecast midcycle returns on invested capital around its weighted average cost of capital, driven by its moaty iron ore business. Our forecasts are based on an assumed iron ore price of USD 75 per metric ton (which we note is materially less than the average price of around USD 100 per metric ton over the past decade), an aluminum price of about USD 0.85 per pound, and a copper price of USD 3.80 per pound. Our midcycle assumed prices are based on our estimates of the long-run marginal costs of production. As Rio’s midcycle ROIC is similar to its WACC of 8.6%, we don’t assign a moat to Rio.

In calculating ROIC, we have added back to invested capital around USD 10 billion in asset and goodwill write-downs taken over the past decade on the basis that these amounts relate to assets developed or acquired in the ordinary course of business and so should be included when calculating ROIC. Some of the more material amounts include USD 4.0 billion in relation to its aluminum business, USD 2.7 billion in relation to copper, and USD 1.5 billion in relation to diamonds. However, we have not added back USD 21.1 billion in relation to aluminum assets purchased in 2007 nor USD 3.3 billion in relation to coal assets purchased in 2011 on the basis that management was subsequently replaced (in 2013) and that Rio has shown much improved investment discipline since then, as evidenced by relatively small write-downs subsequently. If we also add back these USD 24.4 billion in aluminum and coal write-downs, Rio’s midcycle ROIC would be below its WACC. Alternatively, if we instead chose not to add back any write-downs, Rio’s midcycle ROIC in 2030 would be moderately above its WACC.

Looking at each of Rio’s segments in turn:

Iron ore (narrow moat): Rio’s Pilbara iron ore assets have cash costs moderately higher than BHP's, placing it across the top end of the first quartile and into the second quartile of the cost curve. Like Vale, however, Rio expanded much more aggressively during the last iron ore boom than its peer BHP. Even so, its port, rail, and mine assets are fully integrated, benefit from scale, and are favorably located to key Asian markets. New mines are periodically developed to continue to feed and utilize the installed infrastructure base, with incremental capacity able to be added for very low capital costs through incremental expansions and efficiencies, including innovative technology such as automated haulage. Its stakes in the Simandou iron ore mine in Guinea and Iron Ore Company of Canada only comprise around 10% of forecast midcycle iron ore volumes in 2030. Driven by its Pilbara assets, we estimate that iron ore will generate a midcycle ROIC materially above Rio’s WACC. As such, we consider Rio’s iron ore business moatworthy.

Copper (no moat): Rio owns a 30% stake in the Escondida mine in Chile, the world’s largest copper mine. At full capacity, Escondida sits around the 25th percentile in the cost curve, with Rio’s smaller, 100% owned Kennecott copper mine near the middle of the cost curve. The existing open-cut mine at Oyu Tolgoi is much higher cost, but we think that once the underground expansion at Oyu Tolgoi ramps up, this mine will move toward the lowest quartile on the cost curve. However, the inflated capital base of the copper segment means we think the copper segment is unlikely to generate ROIC above Rio’s WACC for at least 10 years. As such, we don’t deem the copper segment moatworthy.

Aluminum, including bauxite and alumina (no moat): While the company’s bauxite mines are in the bottom half of the cost curve, its aluminum smelters sit at various points on their cost curve. Rio’s eight smelters in Canada are all located in the bottom decile, but its remaining smelters are higher cost. Rio Tinto paid USD 44 billion (including assumed debt) for Alcan, a Canadian-based bauxite, alumina, and aluminum producer, in 2007, but ultimately incurred write-downs of more than USD 23 billion on this investment. Even if we don’t add back these write-downs to the segment’s invested capital base, it generates a midcycle ROIC around Rio’s WACC. Accordingly, we don’t deem the aluminum business as moatworthy.

Minerals (no moat): Comprising various operations in mineral sands, borates, salt, and diamonds, these businesses generally lack a cost advantage. As such, we think it unlikely that the minerals segment will generate above-WACC returns.

Exploration projects: These are an immaterial part of Rio and way too early in their potential development to assign any of them a moat.

Rio Tinto is one of the direct beneficiaries of China's continuing strong appetite for natural resources.

The company's operations are generally well-run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options.

Capital allocation has improved following the missteps of the China boom, with management generally preferring to return cash to shareholders rather than to make material expansions or acquisitions.

With miners including Rio benefiting from high commodity prices, governments may use it as a source of tax revenue to plug shaky budgets.

Rio Tinto is leveraged to demand for iron ore. If iron ore prices fall materially, the company’s earnings will decline significantly.

While Rio has shown much-improved investment discipline since its missteps during the China boom, if commodity prices remain high, then the temptation to once again expand aggressively will increase.