Rio Tinto’s (ASX.RIO) Pilbara iron ore sales of 72 million metric tons in the second quarter are up 6% on the same quarter of 2025. Primary aluminum production of 840,000 metric tons is flat, but copper production is down 9%, to 180,000 metric tons.

Why it matters: First-half iron ore, copper, and aluminum production—its major commodities—tracks in line with our unchanged full-year estimates for 280 million, 725,000, and 3.4 million metric tons, respectively.

  • Guidance is reiterated, except for lower copper unit costs on efficiencies and higher-than-expected byproduct prices. We lower our estimate to USD 0.50 per pound, from USD 0.80, at the top end of updated guidance for USD 0.30-USD 0.50.
  • However, we bump up expected Pilbara unit cash costs to USD 24.80 per metric ton, from USD 24.10, near the top of the unchanged USD 23.50-USD 25.00 guided range. Foreign exchange and diesel costs are headwinds, partially offset by likely seasonally higher second-half volumes.

The bottom line: The changes to our estimates are minor, and we reiterate our $125 fair value estimate for no-moat Rio Tinto. Shares trade about 30% above our intrinsic assessment, partly due to bullishness over rising copper demand for use in data centers and the energy transition.

  • At around USD 6 per pound, the copper price is near historical highs, supported by disruptions to sulphuric acid supply due to the Iran war. This is materially above our USD 3.80 midcycle assumption from 2030 based on our estimate of the long-run marginal cost of production.
  • The market could also be projecting that aluminum stays at USD 1.45 per pound and iron ore at USD 100 per metric ton, which are also significantly higher than our respective assumed midcycle prices of around USD 0.85 and USD 75.

Big picture: The Iran war’s impact on Rio’s raw material inputs, production, and supply chains is limited so far. And higher commodity prices—its main earnings driver—are more than offsetting cost headwinds from the conflict.

Rio Tinto shares overvalued, driven by elevated iron ore, copper, and aluminum prices

Rio Tinto is one of the world’s largest miners with operations in iron ore, aluminum (including bauxite and alumina), copper, lithium, and minerals (mineral sands, borates, salt, diamonds). Commodity demand is tied to global economic growth, China’s in particular. Rio Tinto benefited greatly from the China boom over the past two decades. The firm’s largest customer by far is China, with about 60% of sales in 2025. We think the outlook is for earnings to decline, with demand for many commodities likely to soften with the end of the China boom, particularly iron ore, which has disproportionately benefited from the boom in infrastructure and real estate investment.

It has a large portfolio of long-lived assets with low operating costs, meaning it is one of the few miners profitable through the commodity cycle. Most revenue comes from operations in the relatively safe havens of Australia and North America. The invested capital base was inflated by substantial procyclical investment at the height of the China boom, including overpaying for Alcan. The subsequent iron ore expansion was also made when unit capital costs were high. These factors diluted returns to the point where we struggle to justify a moat. As a commodity producer, it is a price-taker, with the lack of pricing power reflected in cyclical commodity prices.

The recent focus has been to run a strong balance sheet, tightly control investments, and return cash to shareholders. Its purchase of lithium miner Arcadium in 2025 was modest for a firm of its size. It is also focused on winning back the trust of investors, regulators, and indigenous people on whose lands many of its mines are located after the destruction of the Juukan Gorge caves in 2020. Rio’s major expansion projects are the Oyu Tolgoi underground mine and expansion of the Pilbara iron ore system’s capacity from 330 million metric tons to between 345 and 360 million metric tons. Those projects are expected to be completed in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs and returns.

Bulls Say

  • Rio Tinto is one of the direct beneficiaries of China’s continuing strong appetite for natural resources.
  • The company’s operations are generally well-run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options.
  • Capital allocation has improved following the missteps of the China boom, with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.

Bears Say

  • With miners including Rio benefiting from high commodity prices, governments may use it as a source of tax revenue to plug shaky budgets.
  • Rio Tinto is leveraged to demand for iron ore. If iron ore prices fall materially, the company’s earnings will decline significantly.
  • While Rio has shown much-improved investment discipline since its missteps during the China boom, if commodity prices remain high, then the temptation to once again expand aggressively will increase.

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