Rio Tinto's Strong Earnings Fail to Impress Skeptical Market

Goldman Sachs downgrades Rio Tinto to 'Neutral' as stock surge leads to stretched valuation. Strong copper earnings offset by disappointing aluminum division performance and rising debt.

Despite posting robust financial results for the 2025 fiscal year, Rio Tinto is facing a cautious reception from market analysts. On February 23, Goldman Sachs adjusted its position on the mining giant's stock, downgrading it from "Buy" to "Neutral." The investment bank simultaneously reduced its price target from 79 to 74 pounds sterling. This reassessment stems from a view that the equity's valuation has become stretched following an approximate 60 percent surge in its share price over the preceding six months.

Mixed Performance Across Divisions

The company's financial performance presented a tale of two segments. While the copper business delivered standout results, the aluminum division proved to be a significant disappointment.

Rio Tinto reported an underlying EBITDA of $25.4 billion, with net earnings reaching $10.9 billion. Both figures came in below Goldman Sachs's projections of $25.9 billion and $11.2 billion, respectively. The primary shortfall was attributed to the aluminum unit, which recorded an EBITDA of $4.4 billion—approximately $700 million under expectations. A 15 percent year-on-year increase in production costs for primary aluminum in North America heavily contributed to this underperformance.

In contrast, the copper segment exceeded forecasts. Driven by higher output at the Escondida and Bingham Canyon mines, the division's EBITDA of $7.4 billion surpassed estimates by $400 million.

Debt Climbs Amid Sustained Capital Allocation

A notable development in the financial statements was the rise in net debt to $14.4 billion, a figure substantially higher than the anticipated $12.9 billion. This increase is linked to capital expenditures totaling $12.3 billion, which included significant investment in the Simandou iron ore project.

Nevertheless, Rio Tinto maintained its commitment to shareholder returns. The company distributed $6.5 billion in dividends, representing a payout ratio of 60 percent of earnings.

The tempered analyst sentiment extends beyond Goldman Sachs. Morningstar's research team also expressed reservation, stating they believe the shares are trading at a 30 percent premium to their fair value estimate of 125 Australian dollars. Their analysis acknowledges that robust copper and aluminum prices have offset weaker iron ore pricing but concludes the stock's current valuation premium is now excessive.

Guidance and Future Uncertainties

Management has reaffirmed its production and investment targets for 2026. However, Goldman Sachs has made a slight downward revision to its own EBITDA forecast for the period, adjusting it to $27.1 billion. This adjustment is predicated on the assumption that elevated aluminum production costs will persist.

The central question for investors is whether the continued strength in copper can sufficiently counterbalance the ongoing pressures within the aluminum business, a dynamic that will likely dictate near-term market sentiment toward the stock.