The fall in Rio Tinto’s (LSE: RIO) shares after its H1 results looks like a potential buying opportunity to me.
Certainly, many of the numbers released on 26 July were poor compared to the same period last year. Half-year net profit after tax was down 43% (to $5.1bn), and sales revenue fell 10% (to $26.7bn). Underlying EBITDA also dropped – by 25% (to $11.7bn).
Given these figures, the mining giant cut its interim dividend to $1.77 per share, compared to last year’s $2.67.
However, it seems to me that lower numbers were to be expected. Since the mid-1990s, China has been the key global buyer of the many commodities needed to power its economic growth.
From the end of 2019 to the end of 2022, its growth rate decreased dramatically with repeated outbreaks of Covid.
Very recently, though, signs have emerged that growth may fully rebound again. And when it does, Rio Tinto will be in a prime position to benefit, in my view.
China’s economy is rebounding
On 17 July, China’s Q2 GDP release showed economic growth increased by 0.8% compared to the previous quarter. This was better than consensus analysts’ expectations of a 0.5% increase.
On a year-on-year basis, the economy expanded 6.3% over the quarter — significantly better than the 4.5% rise in Q1.
It is true that the official Chinese estimate on 4 March for this year’s economic growth was “around 5%”. However, it is also true that China’s President Xi Jinping has staked his political reputation on higher growth than that.
In this vein, on 19 July China’s National Development and Reform Commission pledged more support to boost growth further.
Ideal position in China’s key markets
Rio Tinto has major operations in several of the key commodities that China – and others – want. These include iron ore, aluminium, lithium, and copper.
Iron ore is used to make the steel that is key to China’s infrastructure build-out. Aluminium is used in the jet engines, electric vehicles, and mobile phones manufactured there.
Lithium is essential in China’s batteries for hybrid and electric cars, laptops and other devices.
And copper plays an essential role in Chinese-made computers, smartphones, and other electronic devices. It is also used in wiring for construction.
Analysts’ predictions are for copper prices to rise to $11,000 per tonne by 2024, from around $8,500 per tonne currently.
Core business is solid
Before the cut in the interim dividend announced on 26 July, Rio Tinto was a FTSE 100 dividend star.
Even with the cut in the dividend in the H1 results, the company is paying out $2.9bn. This is a 50% payout of its underlying earnings — in line with its standard practice.
Looking ahead, CEO Jakob Stausholm reiterated the firm’s commitment to shareholders. He said: “We will continue paying attractive dividends and investing in the long-term strength of our business as we sustain and grow our portfolio.”
The key risk I see here is that China’s economic recovery falters. This would mean demand for commodities staying lower for longer and prices staying low too.
That said, I think Rio Tinto shares offer high growth potential and high dividends at a knockdown price. And if I did not already have other holdings in the sector then I would buy them right now.
