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FTSE 100 metals and mining big Rio Tinto (LSE: RIO) introduced a significant reorganisation late final month (27 August).
Structurally, this entails the streamlining of its big 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 mission. The mission 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 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 characterize 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 whole reorganisation is aimed toward sharpening Rio Tinto’s give attention to its most worthwhile belongings. That is to be broadly executed by clearer strategic management, extra focused capital funding, and the discount of working inefficiencies. And that is aimed toward unlocking further shareholder worth.
How was it doing earlier than this?
A danger right here is that this reorganisation fails to ship the meant outcomes.
That stated, I feel Rio Tinto’s 30 July H1 2025 numbers mirrored an underlying power within the enterprise in troublesome circumstances. Regardless of a 13% common decrease iron ore value 12 months on 12 months, 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 12 months additionally noticed the opening of the Western Vary iron ore mission and development 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 remain on track to deliver strong mid-term production growth.”
How does the share value valuation look?
A inventory’s value 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 value tends to converge to its truthful worth over time. So, precisely figuring out this price-valuation hole is vital to huge long-term earnings.
I’ve discovered the easiest way to quantify this hole is thru the discounted money move mannequin. This pinpoints the place any share value ought to commerce, based mostly on money move forecasts for the underlying enterprise.
In Rio Tinto’s case, the DCF reveals its shares are 41% undervalued at their present £46 value. Subsequently, their truthful worth is £77.97.
Will I purchase extra?
I feel the agency’s operational streamlining is a wonderful concept that ought to yield good development over time.
This could push its considerably undervalued share value greater. It also needs to 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.
