Five Charts That Explain Rio Tinto's Persistent Discount to BHP

Rio Tinto's revenue is overwhelmingly driven by iron ore prices. Approximately 55-60% of group revenue comes from the Pilbara iron ore operations in Western Australia. When iron ore prices surged above $200 per tonne in 2021, revenue hit $63.5 billion. When prices normalised to $100-120 per tonne, revenue compressed to $54 billion. The 2025 recovery to $57.8 billion reflects a modest price uptick rather than volume growth. BHP, by contrast, has more diversified commodity exposure (copper represents roughly 30% of earnings), which gives it a more stable revenue profile. The market rewards stability with a higher multiple. This is chart one of the discount story.

Net income fell from $21.1 billion to $10.0 billion despite revenue declining only 9% from peak. That implies an earnings decline of 53% on a revenue decline of 9%, demonstrating the extreme operating leverage inherent in mining. Fixed costs (mining equipment, processing plants, labour, rail, and port infrastructure) do not decline when commodity prices fall. The operating margin compressed from 47% in 2021 to 25% in 2025. BHP's margin volatility is lower because copper margins are less cyclical than iron ore margins. This operating leverage is chart two of the discount story: the market applies a lower multiple to earnings it believes are more volatile.

The margin trajectory explains Rio Tinto's strategic push into copper and lithium. The acquisition of Arcadium Lithium and the investment in copper projects (Oyu Tolgoi expansion, Resolution Copper) are attempts to diversify away from iron ore dependence. If copper grows to represent 25-30% of group earnings by 2028 (up from roughly 15% today), the margin profile stabilises, and the valuation discount should narrow. Across three complete mining cycles since 2008, diversified miners have consistently traded at 2-4x PE premium to single-commodity miners. Rio Tinto's current discount to BHP closely matches this historical pattern.

Rio Tinto's dividend policy is linked to underlying earnings, with a payout ratio of 40-60% of net income. The yield has ranged from 4.1% to 8.5% over the past five years. At the current 4.14%, the yield is near the low end of its range, which means the stock price is near the high end of its range. For income investors, this matters: a pullback to $85 per share would push the yield above 5%, triggering the kind of income-focused buying that historically puts a floor under the stock. The 200-day moving average at $75 would imply a yield approaching 5.5%, which historically has been an exceptional buying signal.