Rio Tinto: Iron Ore’s Glory Days Are Likely Behind Us (NYSE:RIO)

I last updated investors in the leading mining company Rio Tinto Group (NYSE:RIO) in November 2022, after iron ore futures (TIOC:COM) reached its bottom in October 2022. I noted then that RIO dip buyers had already anticipated the bottom in underlying iron ore prices, as RIO bottomed out in September 2022 before surging toward its early November highs.

RIO then surged further toward its late January highs before topping out. Astute sellers anticipated that China’s initial euphoria from its COVID reopening wasn’t sustainable, taking profits after RIO erupted nearly 60% from its September 2022 lows (in price-performance terms). Relative to RIO’s 10Y total return CAGR of 10.2%, I believe the profit-taking was justified, as it was simply “too fast, too furious,” with late buyers joining the bandwagon just as RIO topped out.

With RIO collapsing back to its early November 2022 levels in mid-August, I believe it’s timely for me to update investors on whether they should capitalize on the current levels to add exposure.

RIO’s rise and fall over the past year is inextricably linked to the market’s optimism about the recovery of the Chinese economy. As such, the recent hammering of RIO is justified, as China’s economic recovery has failed to sustain its early 2023 optimism. Significant headwinds relating to its property market malaise have added to Rio Tinto’s challenges, as investors likely priced in more debt defaults in the leading Chinese developers.

Notwithstanding the doldrums in China’s property market, recent indicators suggest that the worst could be over, lifting optimism over the measures enacted by policymakers. Accordingly, Bloomberg reported that “China’s home sales showed signs of moderation in their decline in September.” I believe it’s still too early to ascertain sustained progress. Therefore, investors must assess whether the bottom is in. Despite that, China’s manufacturing PMI rose to 50.2 in September, providing more confidence for investors anticipating the bottom in China’s progress. Notably, it marked “the first time since March that the purchasing managers index crossed the 50 mark, indicating expansion.”

Seeking Alpha Quant’s “B-” momentum grade corroborates my thesis that dip buyers have returned to support RIO’s buying sentiments, helping to sustain it above its September 2022 lows at the $50.9 level. In addition, iron ore futures have not collapsed toward the $77 level formed in October 2022, as it recently closed at the $120 level.

While RIO remains relatively attractive with a “B+” valuation grade, I believe the market could remain cautious, given its “D-” growth grade. Accordingly, it’s possible that while the bottom is in for RIO, the glory days of iron ore leaders like Rio Tinto could be over, in line with the expectations of China’s weak property market. Hence, given Rio Tinto’s iron ore exposure to China’s recovery, the market is likely pricing in tepid growth potential in Rio Tinto moving ahead.

As seen above, RIO has struggled to break above its April 2023 highs at the $70.5 level. Buyers attempted to break out in July 2023 but were decisively rejected, leading to a bull trap (false upside breakout).

Notwithstanding the July bull trap, buyers returned firmly in August. They have held the $58 level firmly, as they correctly anticipated the improvement in China’s economic recovery.

As such, I gleaned that the near-term optimism has likely been reflected, and investors should remain cautious for now.

Rating: Maintain Hold.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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