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When I scout for new additions to my UK shares portfolio, I gravitate towards market trends. Currently, commodities are in the spotlight. While some, like gold and silver, have already surged, there’s still significant potential in other base metals such as iron ore and copper.
One way to tap into a move in a commodity is by searching for mining companies. Rio Tinto (LSE: RIO) operates in 35 countries and has a portfolio consisting of iron ore, copper and aluminium.
It trades at 4.5 times forward EBITDA, compared with a sector average of 5.5 times.
Expansion into copper
There has been a lot of change happening at Rio Tinto. Rio Tinto’s copper assets, which are worth $21bn, are now bigger than its iron ore business. This reflects the company’s investment in a massive copper mine in Mongolia, which is just starting production.
Copper is more exciting than iron ore because it is crucial to the energy transition, and its demand is expected to double by 2040. However, there might be some supply shocks along the way, which could push up its price. Rio Tinto’s increasing exposure to copper might make its equity story more attractive to investors.
Discount to Australian shares
A slight arbitrage benefit for investing in Rio Tinto right now is the discount it has on its Australian listing. The company is public on three exchanges: UK, US and Australian markets.
When converting both the UK and ASX shares into USD, the UK shares are discounted by around $18. It has been a profitable strategy for firms in the past to exploit this difference by purchasing UK shares and shorting ASX shares. However, as a retail investor, I can at least benefit from a smaller premium price right now on the London Stock Exchange for a company I am interested in.
ESG
In a world where emphasis on ESG is growing, Rio Tinto ticks the right boxes. The CEO said, “Decarbonising our assets de-risks our business. It also opens up commercial opportunities as we expand our role in providing low-carbon materials.”
Not only is Rio Tinto compliant with net-zero transitions, but it is also a company that will aid change around the world through its growing operations in copper mining.
Risks
There are risks when it comes to commodity companies. Iron ore has supply-side cautions to raise.
Rio Tinto partly owns the Simandou project, a mining operation based in the Simandou mountains in south-eastern Guinea. This project is expected to start operating this year and could increase the global iron ore market by up to 15%.
China is the main demand for iron ore through its property sector. The country reintroduced steel production controls to reduce supply so as not to outweigh weak steel demand. This has a knock-on effect for iron ore, a key steel-making ingredient.
Overall
As Rio Tinto approaches its first-quarter 2024 production report, I’ll be closely monitoring the company’s performance metrics.
The company is known for being a stable investment option due to its low price volatility and a significant dividend yield of 6.35%. Additionally, Rio Tinto has enough cash to cover interest payments, which provides me with an extra layer of confidence.
My overall thoughts on Rio Tinto are that its increasing expansion and investment in the copper industry will benefit the company in the long term and, with increasing commodity prices, the short term. I’m strongly considering buying the shares for my portfolio soon!
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