Diversification Paying Off For Rio Tinto

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As iron ore demand and prices falter, diversification into the likes of copper, aluminium and lithium is offering relative resilience for Rio Tinto shareholders.

-Rio Tinto’s first half result slightly underwhelmed
-Copper, aluminium offset iron ore
-Trump tariff impact not overly material
-Investors await arrival of new CEO
-Analysts largely neutral on the outlook

By Greg Peel

By Greg Peel

Two of the world’s largest miners of iron ore, Rio Tinto ((RIO)) and BHP Group ((BHP)), have in recent years seen the writing on the wall. Neither can continue to rely on their Pilbara iron ore engine rooms driving the bulk of earnings. The main issue is with their biggest customer.

China’s economy has been in the doldrums post covid. While covid fallout has led to Beijing’s efforts to stimulate domestic consumption failing, for Rio and BHP the greatest problem has been the collapse of China’s housing market. Beijing is doing its best to compensate with major infrastructure projects, but the bottom line is a drying up of demand for steel in housing construction.

To that end, both companies have been diversifying away from iron ore dependence and into metals deemed “future-facing”, servicing demand in green energy and electrification industries, including the likes of copper and lithium. For Rio, additional aluminium capacity adds to diversity.

First Half Result

Rio Tinto’s first half 2025 underlying earnings of US$11.5bn were a modest beat versus consensus, down -5% year on year. Underlying profit of US$4.86bn was nevertheless -10% below consensus, impacted by a higher effective tax rate, D&A and finance charges.

The interim dividend of US148c (50% payout), in line with lower profit, compares to consensus of US161c. Net debt of US$14.6bn rose sharply post the Arcadium lithium acquisition but remains in line with expectations.

Notably, the copper and aluminium divisions showed strong earnings growth, while iron ore earnings declined materially year on year.

Diversification continues to play out in the P&L, Citi notes, with copper and aluminium earnings up 69% and 50% year on year respectively. In contrast, iron ore earnings fell -24% year on year, as lower prices, volumes and higher costs drove a margin squeeze. Iron ore prices fell -15% year on year, and cyclones in the Pilbara impaired production and led to higher costs.

Free cash flow of US$1.96bn exceeded expectations due to lower-than-anticipated capital expenditure.

The World According to Trump

Australia appears to have escaped the most punitive of Trump’s latest tariff settings, copping the low-end 10%, but any tariff ignores the facts that Australia is a loyal US ally, the US has a trade surplus with Australia, and we’re now pretending we’ll all buy US beef. But specific global tariffs of 50% remain on steel, aluminium and copper.  

And while Trump’s ultimate tariffs on China remain in a state of flux (supposed new deadline August 12), that global 50% tariff on imported steel remains – another blow to Chinese steel demand.

Rio does have a major advantage when it comes to copper nonetheless; it owns the world’s largest copper smelter, in Utah. Management thus sees the Kennecott smelter becoming immediately more profitable as a result of the tariffs, despite Rio (along with BHP) mining the bulk of its copper in Chile.

But diversification is again in play –-this time geographical-– with the development of the Resolution copper mine in Arizona, which is set to become the biggest copper mine in the US.

Resolution is 55% owned by Rio and 45% by BHP, and management noted the US government has been supportive with the Resolution Copper project being prioritised by the US administration, the final EIS published and Federal Land Exchange imminent.  

In aluminium, Rio is not so lucky.

It appears aluminium tariffs will mainly impact the final consumer. Management said it has been able to pass on some of the impact, with unit revenue still up around 6% year on year deducting the tariff impacts. Morgan Stanley would argue this figure is for the entire business –-including bauxite and alumina-– and would highlight that smelter margins have suffered due to tariffs.

Management also noted the net tariff impact, when offset against the copper upside from Kennecott, is not considered significant.

In terms of copper capacity, Rio reiterated its strong relationship with the Mongolian government and that it is comfortable with the current state of play with regard the Oyu Tolgoi copper/gold project. Delays in the tax dispute settlement would delay access to higher grade areas, but are not consequential to the mine plan and are only impacting net present value from a time value of money perspective.

New Strategy for Iron Ore

Rio’s Pilbara’s product strategy pivot is underway with a revised grade of 60.8% Fe (from 61.6%) including blended SP10 product.

SP10 fines and lump are derived from the same orebodies as Pilbara Blend but are lower grade products that allow customers to minimise their operating costs.

Rio has started shipping under its new iron ore specification, transitioning towards a simplified product with one blend and a focus on increasing mine production capacity over the medium term. Management noted customer consultation played a key role in shaping its new blend strategy, which has been well received.

Rio’s Simandou mine in Guinea is nonetheless a high-grade project. Simandou attracted the most questions at the conference call, Morgans notes, with the main focus on the mega mine’s expected ramp-up profile.

Management wouldn’t be drawn into giving a view outside of highlighting the ramp-up pace will be driven by the performance of its extensive infrastructure. First ore shipped is still expected in November, highlighting that Simandou is benefiting from exceptional execution from the Chinese partners, and the joint venture is effectively managing elevated Guinea country risk.

Simandou production is nevertheless expected to drive up global high-grade iron ore supply as demand falters.

Lithium a Longer Term Play

Management noted while lithium prices are recovering from recent lows, they are still below long-term averages, with some 25% of the lithium carbonate cost curve currently unprofitable, and the current price environment not supporting the growth in production required to satisfy future demand.

Rio pegs demand at circa 3.0mt in 2030 while allowing producers to recover their cost and justify the capital required. EV penetration has exceeded expectations in 2025 along with a strong pick-up in battery storage-related demand. Rio believes its brine assets and direct lithium extraction technology leave it well positioned for long-term profitability.

Second Half Guidance

Rio has guided to Pilbara unit costs of US$24.3/t, sitting at the top of the guidance range due to cyclone recovery costs which are mostly second half-weighted. Management reiterated volumes are now tracking to the lower end of 323-338mt shipment guidance.

Copper cost guidance is lowered to US110–130c/lb (from US130–150c/lb), driven by the Oyu Tolgoi ramp-up, Escondida (Chile) grades and higher by-product credits. A primary by-product of copper mining is gold, the price of which has soared amidst Trump-driven uncertainty, leading to lower effective copper costs.

Full-year capex guidance was maintained at circa -US$11bn, but the effective tax rate is lifted to 33% from 30% given profit mix.

Morgans sees some challenges entering the second half, with persistent cost pressures (ex-copper), a step down in iron ore product grade, and some -US$6bn of planned capex spend in the period. Morgans also sees the risk of medium-term capex slipping beyond -US$11bn per annum, leaving the broker on the lookout for potential creep in Pilbara mine replacement budgets and a gauge on Rio’s lithium investment plans.

Neutral Views

Strategically, Rio is targeting 4% per annum growth through 2028, supported by strong performance at Oyu Tolgoi, the Simandou iron ore project, and lithium assets including Arcadium (WA), Rincon (Argentina) and Chilean brine operations. With -US$10–11bn annual capex planned, management remains confident in balancing growth and shareholder returns.

Ord Minnett continues to view Rio’s diversified growth strategy favourably and retains a Buy rating, lifting its price target slightly to $121. But Ord Minnett is Robinson Crusoe on this one.

One factor considered by other brokers is the appointment of a new Rio Tinto CEO. Simon Trott will become CEO at the end of August. UBS does not expect a major change in strategy but sees potential for Rio to accelerate costs savings and restructuring and reassure on capital discipline (returns versus capex, especially in lithium) and potential issues in Mongolia.

With Rio’s powder spent on lithium, Macquarie suggests productivity and simplification are key for the new CEO to return Rio to its former glory.

There is no material change to UBS’ forecasts, the broker’s target is unchanged at $115. UBS maintains a Neutral rating, seeing risk/reward as balanced with solid performance and volume growth offset by a muted iron ore price outlook.

Macquarie believes key questions remain for Rio in how it catches up on productivity, resolves the Chinalco overhang and undertakes portfolio simplification.

[Way back in 2009, China’s Chinalco was blocked from taking an 18% stake in Rio Tinto due to national security concerns, restricting Chinalco’s stake to the 14.99% takeover threshold. With 14.59%, Chinalco has proved a thorn ever since, attempting to block Rio’s share buyback plans.]

Macquarie maintains a preference for BHP over Rio, while setting Neutral ratings on both, but looks forward to Mr Trott’s simplification agenda. Macquarie’s Rio target rises to $109 from $106.

Citi raises its target to $119 from $113 but maintains a Neutral rating as the broker awaits greater clarity on Pilbara volumes, tariff outcomes and Trott’s strategic direction.

Morgans has a Hold recommendation, with a $110 target price (up from $109). The miner’s strong balance sheet and diversified earnings base support an above-market forward dividend yield that Morgans sees as underpinned for the next twelve months. This broker also suggests Pilbara execution risks exist around volumes, price realisations, unit costs and capex.

In addition, non-growth capex looks to have peaked at a high watermark, yet its elevated run-rate threatens medium-term free cash flow and dividend capacity, Morgans believes, particularly as Rio ramps up investment in lithium. With a share price near fair value, Morgans awaits clearer operational delivery before turning more constructive.

Morgan Stanley’s thesis for Rio Tinto is unchanged post the first half result, noting a modest shortfall versus consensus but with earnings forecasts revised modestly higher. Morgan Stanley retains Equal-weight and a $118 target.

There are thus one Buy or equivalent rating and five Holds among brokers monitored daily by FNArena covering Rio Tinto. The consensus target price is $115.33.

On current freshly updated forecasts, shareholders should expect earnings (EPS) and dividend to be lower yet again in 2026, albeit in more moderate fashion compared with the falls in motion for 2025 in comparison with last year.

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