Stocks In Focus: Rio Tinto, July 9 2025

0:10G'day and welcome to Motley Fool Stocks in Focus, the weekly series that we publish on the Motley Fool Money podcast and on the Motley Fool's YouTube channel at youtube.com forward slash foolau. We break down a company that's in the news, widely held, topical. What do you want to know about? And of course, we use the expertise of the Motley Fool's gun analyst team to do exactly that for you. We take a look under the proverbial bonnet, tell you about the company. We share the pros and the cons of a potential investment. And yes, I put the team on the spot and asked them what do they reckon the business will do over the next five years relative to the stock market.

0:44Never let it be said. I don't add a little bit of pressure. Hey, before we go into it any further though, my usual two disclaimers, you know it by now, but let's do it again. This is general advice, only not personal advice. What does that mean? It means we don't know your needs, objectives, circumstances, or any of that stuff. All we can do is say, hey, here's what we think about a company, an industry, a topic. And you have to work out whether that general advice is suitable for you or go see a personal financial advisor who will help you understand that in the context of your circumstances.

1:10The second thing is, we're recording this one in mid-June, a couple of weeks ahead. I'm on holidays right now as this goes to air. But the reality is that things change. So whatever we do and say today is absolutely the quality analysis being done by our team. But things change. Prices change, circumstances change, competitors, products, operations, all sorts of stuff. So if you're watching this meaningfully after the middle of July 2025, just be mindful that our view may well have changed since then. The internet is forever, but stock recommendations do change. And our views, of course, should change as the circumstances do.

1:41All right, that out of the way, let me introduce you to the Motley Fool's Director of Research, Ryan Newman. Ryan, oh, g'day. G'day, Scott. Thank you for having me. Mate, thanks for spending some time. Thank you for the work you're doing to help us understand some of these companies a little bit better. This one's a company I think everyone kind of knows, but maybe doesn't know as well as they might. The company, of course, is Rio Tinto, the iron ore behemoth, alongside BHP and Fortescue. I own shares in the latter, which is kind of dominating the iron ore space with Vale from South America really around the world.

2:11It is an absolute giant. That's as much as most people know. What can you tell us about what Rio Tuto is and what the business does? Scott, you put it very simply, the miner. It's also a diversified global miner, though. True. So it's not just focused on iron ore. It does actually have four operating segments. So iron ore is sort of, it represents the bulk of what it brings in. It's about 70 % or thereabouts of its underlying earnings. It also has operations in aluminium, copper, various other minerals as well. These are really important materials for the global economy, essentially. So we know that iron ore is heavily used in buildings, other infrastructure.

2:55It's extremely important for economic growth. Without it, the economy is not going to be expanding. Aluminium, often used in cars and packaging as well as power transmission. It's a really important element for power transmission. Copper as well, that's going to be extremely essential as we move or transition towards a more electrical and renewable energy future, particularly with electric vehicles and the like as well. So I mentioned it is a global diversified miner. The company actually has two headquarters, both in Melbourne and also London. It's also dual listed both across the ASX and the London Stock Exchange.

3:34Scott, I'm actually going to throw you on the spot a little bit here. Go on. Over in the States, our colleagues play a little game, the market cap game. Oh, no. This company's market cap actually took me a little bit by surprise. What do you reckon its market cap is? And we're filming this in early June. We are. We are. But if I'm wrong, I'm going to pretend it was somewhere else so I can find a date I was worried about. I'm going to say, I know CBA recently passed$300 billion as the world of Australia's largest company. So, I'm going to work back from that. So, Rio is probably top five. I'm going to say it's reasonably distant from that.

4:05So, I'm going to say$180 billion. dollars. That was extremely close. I've got 185 billion. There you go. I promise this wasn't set up, by the way. I want full credit for this one. It wasn't set up at all. That's a win. That's a win. Full credit to you, for sure. They said you were surprised. Were you surprised that it was, you thought it was going to be higher or lower? I thought it was probably going to be a little bit lower than that, I have to say. Yeah. Look, I have to say this company isn't one that I would typically follow too closely and we'll sort of get to why in a moment. But yeah, it did take me a little bit by surprise how high it was.

4:36Earning first share the last 12 months or so, US$7.07. I mentioned that because this company is also quite known for its dividend yield. They do pay out between 40 % and 60 % of their underlying earnings as a dividend. So it is seen as quite an attractive stock for income hunters. And I mean, at the time of writing, or at the time this is going to air, it's about a 6 % trailing 12-month dividend yield, fully franked. So it's pretty attractive, but that can fluctuate depending on how earnings go and that itself will fluctuate depending on how commodity prices track. You know it, mate. That's a really great summary.

5:16By the way, I'm retiring from the stock market cap game. I'm done. One and done. Going out on top. Mate, at this point, there's no point in me doing this again because I'm not going to get anywhere near that close ever again on any other company. Right, so you give us a little bit of a foreshadowing of maybe some of the cons, but we'll get to those in a second. Again, this is not a recommendation. We are just going to share some of the reasons why investors might be interested or may want to be cautious, and we'll do them side by side. So, let's do the pros first, mate. Why would someone look at Rio and go, you know what?

5:44That might be a company I might be interested in investing in. Look, at the very core of an investment in a resources business, you need to remember that the products these companies are selling are literally commodities. And commodity, What I mean by commodity is there's very little differentiation between what Rio Tinto has to sell and what someone like BHP or Fortescue has to sell. Yes, there are different qualities of ore or mineral that it can produce, but other than that, there is very little differentiation. So I suppose a way that miners can differentiate themselves, and this is one of the areas that Rio Tinto does differentiate itself, is by operating at the extremely low end of the cost curve.

6:29So we know that mining is an extremely capital-intensive business to be in. So miners that can actually reduce their costs and keep those costs low do differentiate themselves by being able to produce higher margins. They can keep on producing when other competitors are forced to close their operations, when prices drop. Just as an example here, Rio Tinto's, the per metric ton of iron ore produced is about$23 per ton. It's a little bit higher, I suppose, than what BHPs or Fortescue's or Vales are. Those are probably more towards high teens-ish. So it's a little bit higher, but certainly compared to the industry average, it's very low.

7:09Tier 1 sites as well. This is really important because it gives Rio Tinto the access to vital infrastructure like ports, rail, means lower incremental CAPEX, so capital expenditure to expand operations. Predictable production. These are really important qualities, I think, to have for a resources business. Yes, you're probably not going to get the explosive kind of growth that you might expect from a speculative miner when things do go well. But at the same time, there is much less risk than investing in one of those. So I'd say those are probably two of the biggest pros of owning Rio Tinto. I'd also say the dividend firepower, I mentioned a moment ago, about a 6 % dividend yield trailing 12 months.

7:57That's fully franked. This company, as I said, it fluctuates between 40 % and 60 % of underlying earnings. So as I said, if earnings do fluctuate, then so will the dividend. But at the end of the day, a 6 % dividend yield, fully franked, is very attractive. I would say those are probably three of the biggest pros of owning it. I would also say balance sheet optionality. It's got a pretty low net debt to earnings. It does leave room for some opportunistic mergers and acquisition activity. It does also provide it with some flexibility if conditions do continue to worsen in the economy. And I think that's a really important thing to have as well, if you're looking for exposure to the resources sector.

8:37Yeah, nice, mate. Very well done. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

8:49Hey, let's then go to the con side of the ledger. And again, for the same basis, maybe you're thinking, well, hang on, Ryan's made a pretty interesting case there. I can see those pros. I can see why I might want to own shares in Rio. What would you caution people to consider before they do? I mentioned a minute ago that Rio Tinto is a very diversified minor, but it is also quite concentrated in its iron ore operations. About 70%, I think the exact figure was 69 % of underlying operating earnings or something like that. As I mentioned, iron ore is very important for economic growth and it has been in high demand from China historically.

9:26So, I guess in that sense, it is quite levered to the activity in China and certainly the rest of the global economic activity as well. But if growth does begin to slow down, then the demand for iron ore could well pull back, which we know would likely result in a pullback in the I &L price, which would affect the company's earnings profile. So I think that's probably one of the bigger risks that investors should be considering. There's also obviously as well, I mentioned a moment ago that mining is an extremely capital intensive operation in and of itself. Companies aren't always going to get the execution of those projects right.

10:08They might be spending enormous amounts on capital expenditure or infrastructure that never quite generates that return on investment that management is expecting and that investors are expecting. So I think that's a real risk as well. Commodity price volatility, I mentioned a moment ago, I think those are probably the big things that investors really need to consider. I will say though, that if I was looking for exposure to the resources sector, companies like Rio Tinto or BHP Village, sorry, BHP Group, they're not BHP Village anymore. BHP would probably be among the two I would be particularly looking at, alongside Fortescue as well, which I think you mentioned you won't share Zin.

10:46I do. Thank you for mentioning that one. I do. I think it's a topic for another stocks in focus, perhaps. Mate, let's take those pros and cons, put them side by side. And then I want you to look at about five years, five years plus. The Motley Fool are long-term investors. We don't think you can invest in the short-term reliably. In the short run, the market is a voting machine. In the long run, it's a weighing machine, as Warren Buffett tells us Ben Graham used to say. So let's go with the weighing machine rather than voting machine, mate. Over five plus years, what do you reckon the chances are that Rio Tinto manages to be a market beating investment?

11:18This is a really tough one. I often say that I don't want to sit on the fence, so I will give you an answer. I think with companies like Rio Tinto, this is really a commodity bet in many ways. It's a commodity bet. We're not necessarily betting on the company's execution on its own. We're also betting that iron ore will continue to remain strong, that copper will remain in high demand and continue to really drive, I suppose, the electrification and the shift in that entire infrastructure sector. I'm going to say no, it's not a market beating investment over the next five years. And the reason I say that, as I said, I was really on the fence with this one.

12:06I think there's really, as I mentioned, the commodity bet, but also the currency bet, the revenue being in US dollars, earnings being in US dollars as well. The US dollar has been quite strong compared to the Australian dollar. There's just too many things or too many factors that I think could potentially work against Rio Tinto. That said, I don't want to say that it's going to heavily underperform the market either. I I think, as I said, if I was looking for exposure to the resources sector, Rio Tinto is absolutely one that I would be looking at to introduce to my portfolio. Nicely done, mate.

12:37Thank you for not sitting on the fence. I would have absolutely sat on the fence if I was you personally. So I appreciate you not doing that. Betting on the commodity price in five years' time is just such a difficult thing to like. Who knows? Maybe it's$150 a tonne. Maybe it's$40 a tonne. I mean, yeah, really, really, really hard. And that's the challenge of resource investing, by the way. We've had Core Lithium. is another one of the stocks in folks who are at lithium price. I'm not sure if that was in the past, but pre-recording a lot of these, so I'm not sure what the order they're going out in.

13:02I'm pretty sure it's already been out by now. Yeah, it was out last week. There you go. So you've already heard Mitch talk about core lithium by now. Same thing, same problem, right? Who knows what the commodity price will be, but you've done a great job, Ryan, of breaking up the Rio Tinto story, telling us about the business, telling us about the pros and the cons, giving our viewers and listeners more than enough opportunity to decide whether they want to take that risk with their investing, whether they want to get into the resources space, and if so, whether Rio Tinto might be one to consider.

13:25Hey, while you're here, don't forget, please do subscribe to the YouTube channel. If you're watching this on YouTube now, please hit the like button if you like what Ryan's done. And of course you did, because he did a great job. So hit the like button. Why? It's good for his ego, good for mine, but also helps other people find the channel on that particular video. So if you wouldn't mind, that'd be great. Also hit the subscribe button and the notification bell. Why? Because we release new content, which we do at least twice a week, quite often more than that on YouTube. You'll get it sent to you via notification on YouTube and you'll make sure you don't miss anything we do.

13:52If you're on the podcast feed, if you're on the podcast feed, If you're on YouTube, check out the Motley Fool Money podcast. Great podcast. We do this episode. We also do a couple of episodes a week, a mailbag episode, a bit of a rundown on the week in business and investing. So jump into that one. And of course, if you're on the podcast, go and check out the YouTube channel. All right. That's enough ads. That's enough from us. Mate, thank you again for sharing your expertise. And, Fools, thanks for watching. Thanks for listening. Until we speak again, full on. The Motley Fool and people appearing in this program may have positions in the companies mentioned.

14:22General advice only. Please speak to your financial professional to understand how it may pertain to your situation. Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.