In the last month, Rio Tinto (LSE:RIO) shares have rallied, climbing by 8%. While ‘momentum investors’ love to leap on shares while they’re still in an upswing, I use a different approach.
I’m more attracted to a stock that’s trading at a 52-week low.
Although that leaves me at risk of catching a falling knife, it also stops me from overpaying for stocks that are being buoyed by temporary euphoria.
So, with Rio Tinto now 8% more expensive than a month ago, is it too late for me to add the mining company to my portfolio?
A comparative analysis
Let’s compare Rio Tinto’s financial metrics to fellow FTSE 100 mining companies Glencore and BHP.
Rio Tinto’s price-to-earnings (P/E) ratio stands at 17.5, significantly higher than Glencore’s 7.9 and BHP’s 13.4.
This higher P/E ratio suggests that investors are willing to pay more for each pound of Rio Tinto’s earnings, possibly indicating higher growth expectations.
In terms of dividend yield, Rio Tinto offers 4.3%. While respectable, this falls short of Glencore’s more generous 7.3%.
BHP, meanwhile, sits closer to Rio Tinto with a yield of 5%.
Green revolution
Shifting focus to the types of metals each company produces allows me to further differentiate between the three mining giants.
Rio Tinto primarily deals in iron ore, aluminium, copper, lithium, and diamonds, along with industrial minerals like borates, titanium dioxide, and salt.
Glencore’s portfolio encompasses metals, minerals, crude oil, oil products, coal, and natural gas. Meanwhile, BHP focuses on iron ore, metallurgical coal, copper, nickel, and potash.
With global initiatives like the Inflation Reduction Act in the US aiming to boost electrification and support the electric vehicle (EV) market, Rio Tinto’s emphasis on copper, lithium, and aluminium positions it well.
Additionally, strategic operational improvements and investments, notably in the Oyu Tolgoi copper-gold project and the Rincon Lithium Project in Argentina, signal a commitment to these future growth areas.
By comparison, Glencore and BHP’s exposure to fossil fuels like oil and coal could leave them playing catch-up longer term.
Boom and bust
Rio Tinto’s financial performance in 2023, with an underlying EBITDA of $26.3bn and a total dividend of $4.92 per share, demonstrated a decline from the exceptional figures of 2021 ($37.7bn EBITDA and $10.40 per share in dividends). Still, these 2023 results showed notable improvement over 2019’s $21.2bn EBITDA and $4.43 per share in dividends.
This trajectory shows that while the company faced challenges compared to the bull market conditions of 2021, it has maintained a growth trend over the three-year period.
Commodity producers tend to experience boom-and-bust cycles, due to the volatile price movements in metals markets.
Long-term promise, short-term caution
Despite Rio Tinto’s position as a producer of ‘green metals’, its current valuation ratios — particularly the high P/E ratio — turn me off from adding the company to my portfolio right now.
The stock’s recent rally and its higher-than-peers P/E ratio hint at a premium pricing. This might not offer the best entry point.
I’ll keep Rio Tinto on my watchlist for now. And I’ll re-evaluate if its valuation ratios fall more in line with those of its FTSE 100 mining peers.
