Rio Tinto

Rio Tinto's 2026 third-quarter performance across major businesses is satisfactory. Its share of Pilbara iron ore shipments is up 4% from a year ago, to 74 million metric tons. But copper production of 166,000 metric tons is down 5%, and aluminum is also down 2%, to 842,000 metric tons.

Why it matters: The firm is on track to meet our 2026 sales volume forecasts of about 280 million metric tons of Pilbara iron ore, 725,000 metric tons of copper, and 3.4 million metric tons of aluminum. Volumes for each business for the nine months to end September 2026 are three-fourths of our full-year estimate. Guidance is retained and we make no changes to our estimates.

The bottom line: We retain our AUD 130 fair value estimate for no-moat Rio Tinto. Shares are about 23% overvalued, driven by optimism over rising demand for copper from AI-related investment and the energy transition. This sees copper trading near record highs at about USD 6.60 per pound, materially above our USD 3.80 midcycle assumption from 2030. The iron ore price of about USD 90 per metric ton and aluminum price of about USD 1.40 per pound are also significantly above our assumed midcycle prices of about USD 75 and USD 0.90, respectively.

Coming up: Rio's Pilbara mines are being affected by elevated diesel and freight costs, as well as a stronger AUD/USD exchange rate. We forecast 2026 unit cash costs of about USD 25 per metric ton, up 5% on 2025 and at the top end of the USD 23.50 to USD 25.00 guided range. But high by-product prices, including gold, silver, and molybdenum, are more than offsetting cost headwinds in its copper business.

Long view: Our energy team views higher oil and diesel prices as temporary, with freight costs also likely to normalize. We forecast a 5-year EPS CAGR of negative 4%. While we expect higher volumes in 2030 compared with 2026—20% for copper, 16% for iron ore, and 4% for aluminum—which in turn will likely drive improved unit costs, lower prices will more than offset.

We raise our fair value estimate to USD 91 per ADR, from USD 88, driven by stronger copper and aluminum prices.

We continue to assume iron ore averages about USD 100 per metric ton from 2026 to 2029 based on the futures curve. Our assumed midcycle price is around USD 75 per metric ton from 2030 based on our estimate of the long-run marginal cost of production. 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 on declining steel production 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 contributes 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 90 per metric ton.

Cuing off the futures curve, our assumed average copper price from 2026 to 2029 is now about USD 6.50 per pound, up from around USD 6.00. 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 now assume alumina prices average about USD 335 per metric ton from 2026 to 2029, up from around USD 325. We assume around USD 340 per metric ton midcycle from 2030 based on our estimate of the long-run marginal cost of production.

We now assume aluminum prices average about USD 1.60 per pound from 2026 through 2029 based on the futures curve, up from around USD 1.50. 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 continue to assume gold averages around USD 4,500 per ounce from 2026 to 2029 based on the futures curve. 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.