Rio Tinto: Strong Fundamental Drivers And Technical Indicators Cement Bullish Case

In the first half of the year, Rio Tinto Group (NYSE:RIO) showcased a solid financial and operational performance, generating substantial net cash from operating activities and recording impressive profits. This was achieved despite impairments related to its Australian alumina refineries. The company also reported solid underlying EBITDA and earnings. On the dividend front, Rio Tinto continued rewarding shareholders with a significant interim payout. This article conducts a detailed technical analysis of Rio Tinto’s stock price to predict its future path and identify potential investment prospects. The analysis indicates that the stock maintains a robust bullish trajectory with potential for additional gains.

Financial Health Meets Sustainable Practices

Rio Tinto’s first-half 2023 financial results highlight a sound operational approach and a focus on safety and sustainable growth. The company posted an impressive $7.0 billion in net cash from its operating activities, emphasizing its robust cash flow management. Despite a $0.8 billion impairment linked to its Australian alumina refineries, net earnings amounted to $5.1 billion. This financial health is further accentuated by an underlying EBITDA of $11.7 billion and underlying earnings totaling $5.7 billion. Consistent with its dividend distribution history, Rio Tinto declared an interim dividend of $2.9 billion, corresponding to a 50% payout ratio.

Operationally, the company demonstrated rigorous safety measures, recording an All Injury Frequency Rate (AIFR) of 0.36. Yet, inquiries are in process regarding significant safety events at its Iron & Titanium and Kennecott facilities. Its Pilbara Iron Ore sector observed a 7% uptick in production and shipments, with the Gudai-Darri site operating at total capacity. The Oyu Tolgoi copper mine in Mongolia also advances on schedule, signaling a positive trajectory for the company’s copper initiatives.

Investment in asset expansion has been substantial. Rio Tinto has allocated $498 million for the North Rim Skarn underground copper project in Kennecott, Utah, and another $1.1 billion for enlarging the AP60 aluminum smelter in Quebec. The company has also initiated a joint venture with First Quantum Minerals for the La Granja copper project in Peru. The Rincon lithium venture in Argentina is making noteworthy strides, although the capital estimate has been revised to $335 million, up from an initial $140 million. Significant investments include the Matalco aluminum recycling partnership and the Simandou iron ore initiative.

Rio Tinto forecasts a capital investment ceiling of $10 billion annually for 2024 and 2025, emphasizing growth, ongoing capital requirements, and carbon-reduction projects. For 2023, the exploration and evaluation budget is anticipated to reach $1.0 billion, excluding the $0.3 billion already spent on the Simandou project. The estimated effective tax rate on underlying earnings for the year is around 30%.

Rio Tinto’s performance for the first half of 2023 reinforces its financial stability, operational prowess, and dedication to sustainable and safe growth. The company appears well-equipped to navigate future possibilities and hurdles.

Navigating Market Swings Amid an Upward Trend

The long-term outlook for Rio Tinto appears robustly bullish, as demonstrated by the quarterly chart below. A double bottom pattern has been identified at $6.34 and $11.62, serving as a sturdy base for sustained upward movement. This formation originated during the 2008 financial crisis, marked by an economic downturn and weakened demand for commodities like industrial metals. This directly impacted Rio Tinto’s revenue streams and led to a significant slump in its stock price. In addition, the company’s high debt levels, exacerbated by its 2007 acquisition of Alcan, added financial strain during difficult market conditions. These factors cumulatively led to a significant depreciation in the stock value at that time.

However, the double bottom pattern broke through the neckline at $34 after forming a solid base at $11.64. Post-2016, the stock rallied due to various contributing factors, including a revival in commodity prices, strong Chinese demand, and strategic business restructuring. With improved financials, including healthy cash flows and rising profits, Rio Tinto was able to reward investors through dividends and share buybacks. The company’s focus on sustainability and carbon reduction measures enhanced its investment appeal. Despite the initial uncertainties surrounding the COVID-19 pandemic in 2020, stimulus packages and infrastructure investments, mainly from China, underpinned demand for iron ore, sustaining the stock’s upward momentum.

Currently, the stock price is in a consolidation phase at elevated levels. The unfinished Q3 2023 quarterly candlestick displays an inside bar formation, suggesting the possibility of increased prices by the end of the year, should the bar hold until the quarter’s end. A strong wick at $81.92 means sideways movement; however, any dip in the market would likely be viewed as a buying opportunity.

To delve deeper into Rio Tinto’s bullish narrative, the monthly chart below underscores the stock’s upward momentum. The chart features an ascending broadening wedge, ranging from the low of $11.62 to all-time highs. As the stock price approaches the peak of this wedge, volatility appears to be increasing. Intense support levels are visible, thanks to Fibonacci retracements calculated between $11.62 and $81.92. Notably, the stock found substantial support at the 50% retracement level of $46.82 and rebounded strongly. The recent rebound in the stock price from 38.2% retracement indicates a strong rally. Despite a decline in August, the stock rallied to close the month on a high note, leaving behind a compelling candle structure for August 2023.

Key Action for Investors

The above discussion points to a bullish long-term price trajectory with a strong foundation at current levels. Further evidence comes from the short-term chart, which shows an emerging inverted head and shoulders pattern. The head of this pattern is marked by a triple bottom at $48.50, $47.94, and $49.20, as highlighted by red arrows. A right shoulder is presently forming due to a consolidation pattern.

Should the price remain above $48 without closing below this level, upward market momentum becomes more likely. For this bullish trend to attract attention, a monthly close above $76 is essential. Buying opportunities appear favorable at these levels, given the forming right shoulder. If the price rises above $76, adding more positions becomes a viable strategy. Conversely, if the price declines, it may create favorable conditions for accumulating additional positions at lower prices, provided the price stays above $48.

Market Risk

While Rio Tinto has managed to maintain a low AIFR, the current investigations into safety issues at its Iron & Titanium and Kennecott facilities could pose both financial and reputational risks. Additionally, although the Pilbara Iron Ore operation and the Oyu Tolgoi mine in Mongolia are showing strong performance, unforeseen operational hiccups could negatively affect the company’s financial standing.

The company’s revenue is closely tied to the volatility of global commodity markets. A decrease in commodity prices could negatively impact its revenue streams. Furthermore, with international operations in countries like Mongolia and Argentina and through partnerships in Peru, Rio Tinto is vulnerable to geopolitical uncertainties, including regulatory shifts and political unrest. Partnerships with First Quantum Minerals and Matalco introduce an additional layer of complexity and potential for stakeholder conflicts.

Despite a generally optimistic long-term outlook, technical indicators indicate increased market volatility. The stock is in a consolidation phase, making future price movements uncertain. Should the stock price close below $48 for the month, this could signal an increased risk of a downward market trend.

Bottom Line

In summary, Rio Tinto’s performance in the first half of 2023 indicates a well-executed financial and operational strategy. The company demonstrates financial stability and investor value with solid cash flows, a substantial profit, and rewarding dividends. Operationally, Rio Tinto continues to prioritize safety, ramp up production, and make strides in asset development and sustainability projects. Investments in new assets and joint ventures indicate a strategic outlook that is ambitious yet focused.

The technical analysis suggest a bullish long-term outlook for Rio Tinto, supported by fundamental solid metrics and price patterns. The firm’s commitment to growth and sustainability not only adds to its corporate responsibility profile but also enhances its appeal as a long-term investment. However, investors must weigh the risks, including safety investigations, commodity price volatility, and geopolitical uncertainties, which could challenge the company’s otherwise promising trajectory. Investors can buy Rio Tinto shares at current prices, as the stock is in a consolidation phase, forming the right shoulder of an inverted head and shoulders pattern. If the price closes below $48 monthly, this would invalidate the bullish setup. Conversely, a monthly close above $76 could trigger a significant market rally.