Stock Analysis & Ideas

Rio Tinto (NYSE:RIO) Takes a Hit on Infrastructure Troubles

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Rio Tinto took a hit in pre-market trading that extended into Monday morning’s trading session, partially thanks to faltering infrastructure. However, the mining company has a few key advantages behind it that may help.

With prices of everything skyrocketing, being a commodity miner like Rio Tinto (RIO) would seem like a great thing. However, that doesn’t seem to be the case. While the company does have the advantage of producing commodities —specifically, copper, iron, uranium, diamonds, gypsum, and more — it also has some greater issues. Specifically, reports emerged that its copper mine near Bougainville now faces a major threat of flooding thanks to less-than-stellar infrastructure in and around said mine.

Much of the issues seem to trace back to a levee at the Jaba and Kawerong rivers, constructed decades ago.

While Rio Tinto is part of a larger growth industry right now, it may not be in the best position to take advantage of those gains. Nonetheless, I’m bullish on the company right now, but keep a close eye on it if you do get in.

Is RIO Stock a Buy, Hold, or Sell?

Turning to Wall Street, Rio Tinto has a Hold consensus rating. That’s based on two Buys, two Holds, and one Sell assigned in the past three months. The average Rio Tinto price target of $78 implies 30.8% upside potential.

Analyst price targets range from a low of $62 per share to a high of $92 per share.

Also, Rio Tinto currently has a Smart Score of 8 out of 10 on TipRanks, which puts it at the lowest level of “outperform.” That gives it good odds of doing better than the overall market.

A Great Industry, an Uncertain Company

There’s great news on hand for Rio Tinto investors right now. The industry Rio Tinto is in almost ensures great performance, even if Rio Tinto performs less than great. Its incredibly diversified array of mined minerals ensures access to success in good times and bad alike.

Granted, copper is likely to take a bit of a hit. After all, they don’t call copper “Dr. Copper” for no reason. Copper prices have long been used as a barometer of an economy’s overall health.

Since copper is vital for every electrical and electronic application around, it does well to measure several major economic points at once. Housing, commercial real estate, and electronics sales all have a direct connection to copper. Thus, copper prices can provide insight into overall economic health.

That’s actually a bit of a problem for Rio Tinto right now. Copper spent most of 2021’s second half and part of 2022, bouncing around $4.50 per pound. A slip in April took it to about $4.10. It recovered after that but started careening downward to close around $3.20 for the first time all year.

Copper prices are still up, overall, against the last five years, but they’re well off their highs seen earlier this year. It’s clear that the economy is starting to retract, but no one’s told copper prices this yet. They’re still significantly elevated from 2018 levels. The question is, how much of that elevation is due to economic activity, and how much of it is inflationary?

Leaving aside that question, this isn’t the first time we’ve heard of trouble for Rio Tinto. The mine in Bougainville actually poses a threat to the surrounding community, reports note, thanks to the mine’s instability overall.

Rio Tinto recently reached an agreement with the area around Bougainville to establish an “environmental and human rights impact assessment” for its Panguna copper mine.

Additionally, Rio Tinto’s attempt to pick up the Turquoise Hill Resources mining company (TRQ) isn’t going well either. Rio Tinto owns around 15% of the company as it stands, reports note, and it recently enhanced its offer to pick up Turquoise Hill. The revised offer isn’t likely to be accepted, and the same reports suggest Rio Tinto may sweeten that deal further.

While the potential for flooding in and around Bougainville will certainly hurt the company, Rio Tinto isn’t taking the matter lying down. The company put a reported $29 million into an aluminum recycling center at its Arvida Plant in Quebec.

The move will make Rio Tinto North America’s first primary aluminum producer to use recycled aluminum in its currently-produced alloys.

Such a move will definitely help; Rio Tinto ran the Bougainville mines back in the 1980s. Those were different times, after all, and Rio Tinto’s move into recycling can give it back some needed face.

Throw in its recent move to build an array of wind and solar farms to power aluminum operations in Queensland, and that should only help from there. Said array is projected to generate four gigawatts of power. That’s quite a bit of strain taken off the local grid.

Conclusion: Right Place, Right Time. Right Company? Maybe

Bougainville is going to be a serious problem for Rio Tinto, going forward. If anything goes seriously wrong for Rio Tinto, Bougainville will probably wind up being the focus of that problem. However, Rio Tinto is not taking the potential disaster of Bougainville lying down. It’s already inoculated itself, somewhat, with its greener initiatives like recycled aluminum use and wind and solar power generation.

A growing track record of environmental concern may allow Rio Tinto to handwave problems as part of “the old days.” Stepping in to reinforce that critical levee may also help matters, and studies are already underway to determine the best course of action.

Throw in the fact that, right now, Rio Tinto is attractively priced. It’s currently below even its lowest target.

That’s why I’m bullish on Rio Tinto. The company is in a fantastic economic position—specifically, a rising tide of inflation-driven commodities prices that will likely lift all boats. There are certainly troubles ahead. Notably, an economic downturn and possible supply-chain fixes may somewhat cut the inflation out of things.

There’s also the sword of Damocles that is Bougainville to be concerned about. However, Rio Tinto is a hard-working proposition in a major growth field. That makes it an attractive prospect. Still, it’s also a prospect to carefully monitor, going forward.


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