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FTSE 100 metals and mining giant Rio Tinto (LSE: RIO) announced a major reorganisation late last month (27 August).
Structurally, this involves the streamlining of its huge commodities interests into three distinct business units. These are Iron Ore, Aluminium & Lithium, and Copper.
The first unit will integrate the firm’s Western Australian operations with its Canadian iron ore business and Guinea’s Simandou project. The project holds one of the biggest iron ore deposits globally and is divided into 4 blocks. Rio Tinto holds rights to Blocks 3 and 4, which contain iron ore reserves of around 1.5bn tonnes.
The second will combine its Atlantic and Pacific aluminium operations with the recently acquired Arcadium Lithium business. Its current annual lithium production capacity is 75,000 tonnes, with plans to more than double that by end-2028. Together with Rio Tinto’s previous lithium assets, these now represent the world’s largest lithium resource base.
And the third will focus on ramping up the firm’s Mongolian Oyu Tolgoi copper operations. This deposit is one of the largest known copper – and gold — deposits in the world.
Conceptually, this entire reorganisation is aimed at sharpening Rio Tinto’s focus on its most profitable assets. This is to be broadly done through clearer strategic leadership, more targeted capital investment, and the reduction of operating inefficiencies. And this is aimed at unlocking additional shareholder value.
How was it doing before this?
A risk here is that this reorganisation fails to deliver the intended results.
That said, I think Rio Tinto’s 30 July H1 2025 numbers reflected an underlying strength in the business in difficult conditions. Despite a 13% average lower iron ore price year on year, it managed to generate underlying earnings before interest, tax, depreciation, and amortisation of $11.5bn (£8.48bn). This was down 5% from H1 2024’s figure.
The half year also saw the opening of the Western Range iron ore project and construction begun at the Hope Downs iron ore facility. The Arcadium Lithium acquisition was also completed during the period.
Given these advances, the firm said: “We remain on track to deliver strong mid-term production growth.”
How does the share price valuation look?
A stock’s price is whatever the market will pay, while its value reflects the fundamentals of the underlying business.
In my experience as a former senior investment bank trader, an asset’s price tends to converge to its fair value over time. So, accurately identifying this price-valuation gap is key to big long-term profits.
I have found the best way to quantify this gap is through the discounted cash flow model. This pinpoints where any share price should trade, based on cash flow forecasts for the underlying business.
In Rio Tinto’s case, the DCF shows its shares are 41% undervalued at their current £46 price. Therefore, their fair value is £77.97.
Will I buy more?
I think the firm’s operational streamlining is an excellent idea that should yield good growth over time.
This should push its significantly undervalued share price higher. It should also do the same for its already very high dividend yield of 6.7%.
Consequently, I will add to my holding in the firm very soon.
