Rio Tinto plc (RIO) Ordinary 10p

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Rio Tinto has agreed terms to buy Arcadium Lithium for $5.85 per share. That represents a 90% premium to Arcadium's closing price of $3.08 per share on 4 October 2024 and values the business at approximately $6.7bn.

Rio expects to allocate around 5% of its $10bn investment budget across 2025 and 2026 to Arcadium's growth projects.

The deal requires standard approvals, including from Arcadium’s shareholders, and is expected to close in mid-2025.

The shares were broadly flat in early trading.

Our view

Rio is taking advantage of weakness in the lithium market to snap up a set of major assets, and propel its lithium operation to the next level. This is all part of the strategy to build more exposure in areas needed for the energy transition, with aluminium and copper the two other materials in focus.

The Arcadium deal makes sense to us, but it’s a long-term play and it will take some time for the lithium market to shift out of its current dip. Lithium is essential for batteries used in energy storage and electric vehicles. The market’s currently oversupplied, but as the energy transition gathers pace over the rest of this decade, those dynamics are expected to shift the other way – which should be supportive of prices.

Iron ore is still the main performance driver - accounting for 73% of underlying cash profit over the first half. Question marks remain around the demand picture from China, the world's largest consumer of iron ore, as economic growth here is slowing. Recent stimulus measures suggest a more hands on approach from the government, but it remains to be seen if it’ll go far enough to really drive a step change in growth.

Despite a rebase in prices, one of Rio's main attractions remains very much intact. Its flagship Pilbara iron ore business is the group's cash cow. It's not immune to inflation though and costs have been rising, but we're starting to see the rate of increase ease and costs are expected in the range of $21.75-23.5 per tonne for 2024 ($23.2 over H1).

Aside from the Arcadium acquisition, the big new project eating the bulk of the planned $3bn annual growth investment is in iron ore, with the Simandou project in Guinea. It’s one of the world’s largest untapped reserves of high-grade iron ore and the only real large-scale driver of new global supply set to come online in the foreseeable future.

That level of spend is propped up by a resolute balance sheet, which gives options. But there’s unlikely to be much excess capital to return to shareholders over and above the standard 40-60% payout. Nothing is guaranteed.

All in, Rio’s valuation looks relatively attractive. The iron ore portfolio has room to grow with the Simandou project, and Rio is well placed to benefit from demand for decarbonising metals like copper, lithium and aluminium. Commodity price moves will always be key to performance, so investors should prepare for ups and downs.

Environmental, social and governance (ESG) risk

Mining companies tend to come with relatively high ESG risk. Emissions, effluences and waste, and community relations are key risk drivers in this sector. Carbon emissions, resource use, health and safety and bribery, and corruption are also contributors to ESG risk.

According to Sustainalytics, Rio Tinto's management of material ESG issues is strong.

There are comprehensive policies and strong management programmes that address material ESG issues and it has adopted a 2050 net zero climate change target for Scope 1 & 2 emissions across operations. But in recent half-year results, management warned its interim target of a 15% reduction by 2025 would not be met without the use of carbon offsets.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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