Rio Tinto ($RIO)

Updated: Feb 1

Rio Tinto Group ($RIO) is the second-largest metals and mining corporation in the world behind BHP ($BHP). Such a large mining and metals corporation does just about everything, with a historical focus on producing iron ore, copper, diamonds, gold and uranium. The company was founded in 1873 with the purchase of a mine in Rio Tinto Spain. Their focus is primarily on minerals extraction with significant refining operations, particularly for bauxite and iron ore. Rio is a truly global company and one of the larger consistently profitable companies in the world.

Commodities are in a new bull market after many years in consolidation. Companies like Rio Tinto are positioned very well given their global positioning and ability to easily fund expansion to support technological trends including electrification and growth across the emerging world. Electrification has been a long time thesis at WEquil.Capital going back to our investment in Tesla in mid-2019 and investments in solar and electrification more broadly in late 2019.

Our thesis on the material needs of the emerging world is a more recent thesis...driven by virtual learning, work from anywhere, and platform technologies like Linkedin, Amazon, YouTube, Facebook and even our own WEquil.App. We view these two trends, electrification and the emergence of the emerging world, as distinct but complimentary forces driving the commodity boom. Rio Tinto is one of several investments that we are making in the mining space to position for these trends to continue and accelerate in 2022.

In this article we discuss Rio Tinto's background and the value proposition.

Environmental Destruction and Controversy

In May 2020, Rio Tinto demolished a sacred cave in in Western Australia to access high-grade iron ore. They had permission from the government, but went against a powerful activist. Rio's leadership apologized for the outcry, but the CEO Jean-Sébastien Jacques resigned and continues to suffer a poor public perception and has become a target for environmental and racial injustice activists around the world.

Rio Tinto is getting pressured by activist groups and governments in several countries. Environmental destruction at its Grasberg mine in Indonesia led Norway to exclude Rio Tinto from its Government Pension Fund. Bougainville in Papua New Guinea is still recovering from poisoned fields leftover from Rio mining operations. The Apache Tribe in Arizona is fighting to protect its lands from mineral extraction. More recently, Rio Tinto was forced to pause lithium mine in Serbia after protests.

ESG stands for Environmental, Social, and Governance. Investors have been increasingly interested in ESG investing as the Google Trend below indicates. Rio Tinto is one of many companies that are actively trying to get out of the way of this trend by signaling their support for carbon neutrality and investing in more sustainable and less destructive business practices.

ESG Investing - Google Trend for the World

ETFs that are engaged in ESG investing are also on the rise and these ETFs systematically remove companies like Rio Tinto because it is one of the top 100 industrial greenhouse gas producers in the world. In March 2018, Rio Tinto's rejected pressure by investors to adhere to the Paris Agreement.

Carbon accounting is challenging ... and some debate here is understandable. There is a complex process for measuring how much carbon dioxide equivalents an organization emits. Many governments have created a carbon credits marketplace creating demand for carbon credits. One reason why Rio rejected the Paris Agreement is that a lot of its carbon footprint comes from "Scope 3 Emissions" generated by its customers outside of its control. Still, the carbon marketplace is creating costs that Rio Tinto can't ignore because these costs are a threat to its bottom line.

So Rio started taking steps to take the ESG movement more seriously.

  • September 2019 ... Rio signed a partnership with China Baowu Steel Group to help reduce emissions from their collaboration in steel making.

  • Late 2020 ... change in leadership to allow for more aggressive action to change company culture and priorities.

  • Early 2021 ... set aside $7.5 billion in related capital expenditures to fund 5GW of wind and solar projects, electrification of trucks, mobile equipment, and rail operations.

ESG was front and center in their most recent published presentation dated October 2021. There were 14 references to ESG with detailed emphasis and graphics like the one below outlining leaderships interest in addressing demands from activists and shareholders alike.

So at least on the surface there is a push by Rio to address ESG and become more flexible and adaptable to the environmentalist movement.

Execution on these plans is unclear...but a key issue investors should think hard about before investing in Rio Tinto.

Rio's Value Proposition

Rio Tinto is consistently profitable and mines many of the materials necessary for growth in the emerging world and continued the low valuations require explanation. Rio Tinto pays a dividend of 10% and currently has one of the lowest P/S ratios in its history.


The answer seems clear enough from the recent history of controversies. Rio Tinto looks cheap on balance sheet because of uncertainty caused by...

  • Recent changes in leadership

  • Impact of ESG on their business model

  • Poor sentiment around the company given headlines like those coming out of Australia

You can also add to this struggles in emerging economies on account of the pandemic.

"Crucially, there are often no alternatives to the commodities we produce."

We agree.


Rio Tinto is part of a basket of inflation hedge assets that we believe will perform well not just in 2022 but for years to come. We see larger material producers like Rio Tinto, Vale, BHP as well positioned to take advantage of the new commodity bull market. They are more likely to "weather the storm" as compared to smaller mining companies. Larger companies have more resources, are better diversified geographically, can invest faster in the right mines and confront political challenges more easily. In short...they are more resilient. That is why they have been around for a century.


Joe McPhail

CEO of WEquil Group