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FTSE 100 metals and mining large Rio Tinto (LSE: RIO) introduced a significant reorganisation late final month (27 August).
Structurally, this entails the streamlining of its large commodities pursuits into three distinct enterprise items. These are Iron Ore, Aluminium & Lithium, and Copper.
The primary unit will combine the agency’s Western Australian operations with its Canadian iron ore enterprise and Guinea’s Simandou undertaking. The undertaking holds one of many largest iron ore deposits globally and is split into 4 blocks. Rio Tinto holds rights to Blocks 3 and 4, which include iron ore reserves of round 1.5bn tonnes.
The second will mix its Atlantic and Pacific aluminium operations with the just lately acquired Arcadium Lithium enterprise. Its present annual lithium manufacturing capability is 75,000 tonnes, with plans to greater than double that by end-2028. Along with Rio Tinto’s earlier lithium belongings, these now signify the world’s largest lithium useful resource base.
And the third will give attention to ramping up the agency’s Mongolian Oyu Tolgoi copper operations. This layer is without doubt one of the largest recognized copper – and gold — deposits on the earth.
Conceptually, this complete reorganisation is geared toward sharpening Rio Tinto’s give attention to its most worthwhile belongings. That is to be broadly executed by means of clearer strategic management, extra focused capital funding, and the discount of working inefficiencies. And that is geared toward unlocking extra shareholder worth.
How was it doing earlier than this?
A threat right here is that this reorganisation fails to ship the supposed outcomes.
That stated, I feel Rio Tinto’s 30 July H1 2025 numbers mirrored an underlying energy within the enterprise in troublesome circumstances. Regardless of a 13% common decrease iron ore worth yr on yr, it managed to generate underlying earnings earlier than curiosity, tax, depreciation, and amortisation of $11.5bn (£8.48bn). This was down 5% from H1 2024’s determine.
The half yr additionally noticed the opening of the Western Vary iron ore undertaking and building begun on the Hope Downs iron ore facility. The Arcadium Lithium acquisition was additionally accomplished throughout the interval.
Given these advances, the agency stated: “We stay on monitor to ship sturdy mid-term manufacturing progress.”
How does the share worth valuation look?
A inventory’s worth is regardless of the market can pay, whereas its worth displays the basics of the underlying enterprise.
In my expertise as a former senior funding financial institution dealer, an asset’s worth tends to converge to its honest worth over time. So, precisely figuring out this price-valuation hole is vital to huge long-term earnings.
I’ve discovered one of the best ways to quantify this hole is thru the discounted money movement mannequin. This pinpoints the place any share worth ought to commerce, primarily based on money movement forecasts for the underlying enterprise.
In Rio Tinto’s case, the DCF exhibits its shares are 41% undervalued at their present £46 worth. Due to this fact, their honest worth is £77.97.
Will I purchase extra?
I feel the agency’s operational streamlining is a wonderful concept that ought to yield good progress over time.
This could push its considerably undervalued share worth increased. It must also do the identical for its already very excessive dividend yield of 6.7%.
Consequently, I’ll add to my holding within the agency very quickly.
