Diversification Paying Off For Rio Tinto

Commodities | 10:30 AM

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.