Is now the time to buy undervalued Rio Tinto shares?

Rio Tinto (LSE:RIO) is a constituent of the FTSE 100 index. It is a mining company that operates globally, specialising in base metals. These include iron ore, aluminium, and copper. Down 13% in the past month, are Rio Tinto shares a bargain at current levels? Let’s take a closer look.

Why Rio Tinto shares may be cheap

By looking at price-to-earnings (P/E) ratios, I can better understand if a share price is under- or overvalued. Rio Tinto shares are currently trading at 5,450p.

The company has a trailing P/E ratio of 5.09. On its own, this doesn’t tell me that much. Compared to a competitor, however, it may indicate if the share price is low. 

Glencore, another global miner, has a trailing P/E ratio of 15.83. This is significantly higher and suggests that I would be getting a bargain if I bought Rio Tinto shares soon. 

Of course, looking at P/E ratios is only one part of my investment process. I need to look deeper at the company production and financial records to support my investment decision.

Base metal production

The business reported a decline in production for the first three months of 2022. Specifically, the production of iron ore fell by 15% and copper by 5%, on a year-on-year basis.

This was mainly due to supply chain issues and labour shortages. While there is a risk that this production trend continues, I view these as short-term issues that could subside in the near future.

In addition, the operating environment is currently favourable for Rio Tinto shares. The ongoing war in Ukraine has led to supply concerns over the availability of steel. 

With iron ore being a key component in steel, this supply shortage could favour the business.

The firm may continue to benefit from the historically high metal prices and this may lead to an increase in the price of Rio Tinto shares.

Strong financial results

Financially, the company has been strong and consistent. Between 2020 and 2021, pre-tax profits doubled, climbing from $15.3bn to $30.8bn.

What’s more, earnings per share (EPS) grew from 482.8¢ to 1,321.1¢ between 2017 and 2021. 

By my calculation, this means Rio Tinto has a compound annual EPS growth rate of 22.3%. For a FTSE 100 firm, this is strong earnings growth.

It should be noted, however, that past performance is not necessarily indicative of future performance.

While this business has delivered attractive growth for shareholders over the past five years, it is also appealing to me because of its dividend. Last year it paid a total dividend of $10.40 per share, a record for the company. It is always possible, however, that dividends can be changed or cut in the future.

Overall, Rio Tinto shares appear to be undervalued and the firm is enjoying the benefit of higher commodity prices. I don’t see this commodity trend ending anytime soon, so I think the share price may start to climb. I will be buying shares soon.