The Rio Tinto (LSE: RIO) share price first hit £60 in 2021. Since then, it’s remained stuck in a trading range that’s seen the stock swing repeatedly between about £45 and £60.
Rio is known for its generous dividends, funded by the profits from its massive, low-cost Australian iron ore mines. But this picture may be starting to change.
The group’s growing copper business looks well positioned to make a stronger contribution to profits in the future. I think it’s worth keeping an eye on this evolving business, which has a well-deserved reputation as a reliable income stock.
Rio confirms copper growth target
In this week’s first-quarter update, Rio Tinto chief executive Jakob Stausholm confirmed that the miner is on track to produce 30%-50% more refined copper in 2024 than it did last year.
Mr Stausholm says that the long-running development of the Oyu Tolgoi underground copper mine in Mongolia is making progress and expected to reach full capacity between 2028 and 2036.
Copper projects are moving forward elsewhere too. Rio’s Kennecott copper mine in Utah, USA, restarted underground production for the first time in 40 years during the first quarter. Projects in Arizona and in Western Australia are also in the early stages of development.
Copper demand could double
Growing demand from sectors such as renewable energy, AI, and electric vehicles means that the world’s appetite for copper is expected to continue growing. Forecasts I’ve seen suggest copper demand could double by 2040.
The copper price has risen by more than 10% so far in 2024 and is approaching record levels. The price of this important industrial metal has now doubled from the lows seen during the 2015/16 mining slump.
Some commodity analysts believe copper supply could fall short of demand over the coming years. If they’re right, miners such as Rio could benefit from a multi-year bull market.
This could happen, but personally I’m always cautious about projections like this. High prices sometimes trigger a reduction in demand. Commodity market conditions are notoriously hard to predict.
Even so, I do think that a repeat of past slumps seems very unlikely at the moment.
Share price outlook
For income investors like me who are tempted by Rio Tinto’s 6.7% dividend yield, the key question is: what could happen next to the shares?
In the short term, I think Rio’s profits could be held back by the iron ore price. Rio generated more than 90% of its earnings from iron ore last year, but its price has fallen by around 25% so far this year.
However, after years of heavy investment, I think that copper will soon start to make a more meaningful contribution to Rio’s earnings.
The latest broker forecasts I’ve seen suggest that that Rio will report adjusted earnings of $7.40 per share this year. This would be slightly ahead of last year’s figure of $7.25.
These estimates price the stock on around nine times earnings and would provide good support for the dividend.
On balance, I think Rio shares could offer long-term value from current levels. However, I suspect that short-term headwinds could mean that the shares remain stuck below £60 for a while longer yet.
