Rio Tinto (RIO)

Total return at 5 years: 5.5%/year = 0.5% appreciation + 5.0% dividend. The target price ($97) is ex-dividend; the $24 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $169 · Multiples $98) exceeds the market price ($94).

Today — fairly valued: at $94 trades ~4.2% below its value discounted to today (~$98); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($97) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$64.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($94) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-8.9%/year) than we project (3.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$6.7 bn of owner earnings in year 5 (vs ~$12.6 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Utilidad atribuible normalizada (P/E mid-cycle). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the fiscal year ended 31 December 2025, not a rolling twelve-month period: Rio Tinto files an annual 20-F and publishes its interim results on 6-K with no structured data, so the quarter is never tagged and manufacturing a rolling period would mix a partial window with full fiscal years. The 6-K of 29 July 2026 (file number 0001628280-26-050377) carries in its exhibit 99.1 (rio-20260630_d2.htm) the results of the first half of 2026: revenue of US$31,028 million (+15% year over year), underlying earnings before depreciation of US$14,826 million (+28%), underlying earnings of US$6,851 million (+43%), attributable profit of US$6,664 million (+47%) and free cash flow of US$3,834 million (+75%), with an underlying return on capital employed of 17% and net debt of US$14.1 billion. The TTM to June 2026 (fiscal 2025 plus the first half of 2026 less the first half of 2025) gives revenue of US$61,793 million (+7.2% over the fiscal year) and attributable profit of US$12,102 million. That gap against the fiscal year is price and not volume, and that is why it is not carried into the path: realized prices for the half were 591 cents per pound of copper (+35%), US$4,343 per tonne of aluminium (+39%) and US$18,960 per tonne of lithium carbonate equivalent (+22%), while Pilbara iron ore —close to half the business— was nearly flat at US$85.2 per wet tonne (+2.4%), and the company itself attributes barely three points to volume growth. Extrapolating those prices would mean valuing at the peak of the cycle. Year 0 is kept at the fiscal year ended December 2025, which is also the annual reporter's convention, and the margin is normalized to 18.4%: the same one the business delivered in the first half of 2025 with more normal prices (underlying earnings of US$4,807 million on revenue of US$26,873 million, 17.9%). Year 1 grows 4.5% on contracted volume —the Simandou and Oyu Tolgoi ramps—, not on price. Depreciation and amortization from the structured data was frozen at 2021, so it was taken from the income statement in the filing itself: US$6,271 million in 2025 (2024: US$5,744 million; 2023: US$4,976 million), as was capex, which comes from the cash flow statement (US$12,335 million in 2025; US$9,621 million in 2024; US$7,086 million in 2023). The year-0 margin is normalized for the impairments of Rio Tinto Iron and Titanium Quebec and QIT Madagascar (US$341 million) and restructuring costs and non-recurring items (US$606 million): 18.4% against the 17.3% reported; the company itself publishes underlying earnings of US$10,868 million in 2025 (2024: US$10,867 million), a figure close to this normalization. Maintenance capex is set at depreciation (US$6.27 billion, 50.8% of total capex of US$12.34 billion) because revenue is growing and the excess buys new capacity — Simandou shipped its first ore in December 2025 with a thirty-month ramp, Oyu Tolgoi is on its way to being the world's fourth-largest copper mine by 2030 and Rincón adds lithium; in mining that expansion investment takes years to appear in revenue. The capex path falls from US$12.3 to US$9.5 billion as those projects finish: it is an analyst assumption, not published guidance. The change in working capital is taken as zero because the filing does not disaggregate it in the available extract. The dividend per share is set at US$3.88: 60% of normalized mid-cycle earnings (US$6.47 per share), which is the ceiling of the declared policy of paying out between 40% and 60% of underlying earnings and is where the company has been paying. It closely reproduces the real fiscal 2025 dividend —US$4.02 declared, on underlying earnings of around US$6.70 per share— and is deliberately different from the trailing twelve months paid (US$4.65 = the 2025 final of US$2.54 plus the 2026 interim of US$2.11), which corresponds to earnings above mid-cycle: applying it against normalized earnings would give a payout of 69%, outside the band the company itself declares, and would mean stacking a peak dividend on normalized earnings. The declared dividend tag in the structured data was frozen at 2021. The 4% growth approximates that of base case underlying earnings, not a contractual coupon. No buybacks: the company declares that it neither repurchased nor cancelled shares in 2023, 2024 or 2025.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $97 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $94, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $97 in 5 years plus $24 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $98. Against the current market price ($94), the margin of safety is 4.2% (trades below the maximum → there is margin) and the total return at that price would be 5.5% annually.

• Entry multiple. 15× on mid-cycle normalized earnings, in the low zone of the commodities archetype's exit band.
• Estimated return. +5% annually in the base case, with verdict Fairly valued: appreciation contributes little and the dividend nearly all of it.
• Dividend yield. 4.5% on a 40-60% payout of underlying earnings, paid at the top of the range for a decade.
• Sensitivity to the cycle. The adverse scenario yields +5% annually: mid-cycle earnings is the assumption the whole outcome hangs on.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✕ High incremental ROIC (compounding)
• ✓ CFROIC backs up the ROIC (100%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Return on capital. 12.9% on the balance sheet's invested capital, above the 10% bar, though the underlying return on capital employed the company reports fell from 18% to 16% in 2025 (17% in the first half of 2026).
• Cash flow predictability. Operating cash flow held between US$15.2 and US$16.8 billion over three years, but earnings depend on the commodity price and are not predictable.
• Cash conversion. Calculated free cash flow fell to US$4.5 billion from US$8.1 billion over two years, entirely on growth capex and not on any deterioration in operating cash flow; under the company's own definition, reported free cash flow is US$4.0 billion (2024: US$5.6 billion).
• Reinvestment runway. It exists and is of scale — Simandou, Oyu Tolgoi, copper, lithium — but requires capital that does not yet yield and is concentrated in difficult jurisdictions.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Rio Tinto's engine is volume times commodity price, and the company does not set the price: it comes from the London Metal Exchange for aluminum and copper and from reference indices for iron ore. That is why the relevant drivers are physical production — 327.3 million tonnes of iron ore in Pilbara, 883 thousand tonnes of copper, 3,380 thousand tonnes of aluminum, 62.4 million tonnes of bauxite and 57 thousand tonnes of lithium carbonate equivalent in 2025 — and unit cost, the only thing under management's control. The segment revenue shown is reportable segment revenue: its sum, US$59.77 billion, reconciles with the consolidated US$57.64 billion by adding Other operations (US$3.11 billion) and subtracting the share of equity-accounted units (US$5.24 billion); inter-segment transactions are just US$13 million.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (31-dic-2025): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Committed volume. Simandou shipped its first ore in December 2025 with a stated thirty-month ramp-up; copper is targeting one million tonnes by 2030.
• Core growth. Pilbara produced 327.3 million tonnes, practically flat year over year: the largest business is not growing in volume.
• Reinvestment and return. Invested capital grew US$17.9 billion in a year and incremental return is still negative, because construction in progress does not yet contribute earnings.
• Lithium as a new runway. Arcadium produced 57 thousand tonnes of carbonate equivalent in 2025, of which 46 thousand are attributable to Rio Tinto after the March closing, with a pre-tax loss of US$94 million in a depressed market.

• Differentiated product or commodity. Iron ore and primary aluminum are indistinguishable between producers of the same grade: the market sets the price and the company is a price taker.
• Ten-year relevance. Steel, aluminum and copper are structural inputs for construction and electrification; the demand exists, what varies is the price and the grade required.
• Position on the cost curve. US$23.5 per tonne in Pilbara and 67 cents per pound of copper C1 cost against an average realized price of 457 cents: the company produces at the low end of the curve.
• Pricing power. Nonexistent by the definition of the business: prices come from the London Metal Exchange and from iron ore reference indices.
• Recession behavior. Diversification cushions but does not protect: in 2025 the net price effect was zero because iron fell and the rest rose, a result that cannot be assumed to repeat.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• ✓Interest coverage (EBIT / interest)15.0x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 100% of ROIC
• !Value creation (ROIC − 10% bar)+3pp
• ✕Malinvestment test (capex vs incremental ROIC)Investment mode 2.0x with incremental ROIC < cost of capital
• –Float / working capitalNeutral WC
• –Dilution (SBC % of revenue + shares)no data

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Net leverage. 18% at year-end 2025 against 9% the year before: net debt went from US$5.49 to US$14.36 billion after the US$7.6 billion Arcadium purchase.
• Interest coverage. Finance costs of US$1.06 billion against operating income of US$14.94 billion: fourteen times coverage.
• Credit rating. The company states an anchor rating in the single-A category, which allows it to invest through the cycle.
• Equity. Total equity of US$67.02 billion, of which US$62.20 billion is attributable to Rio Tinto shareholders.
• Cash. US$8.87 billion of cash and equivalents plus US$0.55 billion of short-term investments at fiscal year-end.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Of the US$26.0 billion allocated in 2025: US$12.3 billion to capex, US$7.6 billion to the Arcadium Lithium purchase and about US$6.1 billion to dividends (373 cents per share on 1,638 million shares). There were no buybacks. The stated policy pays out between 40% and 60% of underlying earnings and has been paying at the top of the range for a decade.

• Capital allocation. US$12.3 billion of capex and US$7.6 billion on Arcadium in the same year, financed partly with debt: net debt tripled.
• Alignment. The executive team was cut from eleven to nine members with US$650 million of annualized productivity benefits stated. There is no detail on share ownership because the issuer does not file a proxy statement.
• Payout policy. Payout of 40-60% of underlying earnings, with a decade of paying at the top of the range and no buybacks in 2023, 2024 or 2025.
• Candor. The filing discloses five-year total shareholder return below both of its benchmark indices and opens the CEO's and chairman's letters with the period's fatalities.

• Free cash flow depressed by voluntary growth capex: operating cash flow rose to US$16.8 billion and capex to US$12.3 billion, leaving the calculated free cash flow at US$4.5 billion (the company reports US$4.0 billion under its own definition).
• The market discounts that a miner's earnings contain commodity price and not just operating performance, which is why the multiple sits persistently below the market.
• Pre-tax impairments and non-recurring costs of US$947 million depress 2025 reported earnings without touching the value of the business.
• The depressed lithium market turns a US$7.6 billion acquisition into a negative short-term contribution.

The low multiple has an economic explanation and not only a perception one: this is a business of prices it does not control, at the peak of its investment cycle and with net debt tripled after Arcadium. There is a subsequent event after fiscal year-end that is disclosed: exhibit 99.1 of the 6-K dated July 29, 2026 (accession number 0001628280-26-050377, document rio-20260630_d2.htm) carries the first-half 2026 results — revenue of US$31,028 million (+15% year over year), underlying EBITDA of US$14,826 million (+28%), underlying earnings of US$6,851 million (+43%) and free cash flow of US$3,834 million (+75%) — well above the fiscal 2025 that anchors this valuation. The TTM through June 2026 (fiscal 2025 plus first-half 2026 minus first-half 2025) gives revenue of US$61,793 million and attributable earnings of US$12,102 million, levels the base case only projected reaching in year 3. That gap is one of price, not volume: realized copper rose 35%, aluminum 39% and lithium 22%, while Pilbara iron ore — close to half the business — was nearly flat (+2.4%) and the company attributes just three points of the growth to volume. The valuation keeps fiscal 2025 as year-0 and normalizes the margin to 18.4%, what the business delivered in the first half of 2025 with more normal prices: the market is not discounting a level error but the price reversion that this valuation already assumes.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -8%/year (-34% total): the margin of safety protects the downside. The bull (+14%/year, +90% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Commodity price. Half of revenue and close to 60% of underlying EBITDA come from iron ore, whose price it does not control.
• Geopolitical concentration. The two largest projects are in Guinea and Mongolia. The filing flags geopolitical and trade resilience as a rising risk.
• Tariffs. US tariffs cost close to US$1,000 million gross on primary aluminum in 2025 and there is an open investigation on copper.
• Asset integrity. Slope stability, tailings dams and process safety, with two fatalities at the Simandou site in the last twelve months.
• Social license. Access to land and resources depends on the trust of Indigenous peoples and communities, with exposure named at six operations.
• Capex execution. US$12.3 billion a year committed to projects that do not yet contribute earnings; calculated free cash flow fell to US$4.5 billion (US$4.0 billion under the company's own definition).

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A narrow moat and ROIC 13% above the 10% bar, but the margin is limited (+4%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 4% at a PEG of 4.2 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 10% (EBIT/EV) + ROIC 13% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -9% vs our 4%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -15%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: cost advantage, efficient scale, intangibles → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -9%, within what we project (4%) — the story squares with the numbers.