Five strategic priorities for Rio Tinto's new CEO to unlock 40% valuation discount

Rio Tinto's incoming CEO inherits a multi-billion-dollar challenge: unlocking a regulatory roadblock that has halted share buybacks for five years. The mining giant trades at a 40% discount to Wood Mackenzie's sum-of-the-parts NAV value, despite having a strong platform for growth. As Rio Tinto's new CEO takes charge in H2 2025, Wood Mackenzie's analysis reveals five interconnected priorities that will determine whether the company can close this valuation gap.

"Addressing barriers to share repurchases must be the top priority for any incoming CEO, as this capability underpins all strategic decisions," said James Whiteside, Head of Metals and Mining Corporate Research. "Given the company's trading discount, buybacks have the potential to deliver higher returns than industry peers. The inability to execute share repurchases removes the opportunity cost of capital and creates a significant capital allocation constraint. This mechanism is critical for Rio Tinto, which is positioned to deploy more capital than any other major peer over the coming decade."

Operational excellence offers immediate US$1 billion opportunity The clearest value creation opportunity lies in operational improvements. A US$7 per tonne margin gap with BHP has opened up in Pilbara iron ore operations, and closing just half this differential could unlock US$1 billion in annual EBITDA for the remainder of the decade.

Capital allocation strategy tests industry discipline: Rio Tinto plans to invest more than any mining peer over the next decade, pushing reinvestment rates from recent norms of 40% to nearly 60% of operating cash flows. This aggressive approach, driven by commitments to Simandou iron ore, Oyu Tolgoi copper, and newly acquired lithium assets through the US$6.7 billion acquisition of Arcadium, tests whether embracing growth-oriented risk is the optimal strategy for this point in the cycle.

Geopolitical constraints limit financial flexibility: Perhaps the most significant barrier to unlocking shareholder value involves resolving buyback constraints imposed by Chinalco's 14.99% ownership cap. This regulatory restriction has prevented share repurchases since 2020, limiting capital allocation flexibility when buybacks would generate a 16% internal rate of return—the highest among peers.

Decarbonisation ambitions face commercial reality: Rio Tinto's 50% emissions reduction target by 2030—more ambitious than most peers' 25-35% goals. The allocated decarbonisation budget of 7% of total capex is now trailing peers, forcing the company to look at commercial solutions which add to operating costs. The new CEO must decide whether to continue to commit to this target, continue spending or take a reality check.

Mega-merger potential addresses post-2028 copper growth gap: The potential for combinations, particularly with Glencore, illustrates how companies are seeking scale and enhance relevance in equity markets and resilience in commodity markets. Such deals could address Rio Tinto's post-2028 copper growth gap, but the current valuation discounts limit the pool of companies that Rio Tinto could acquire accretively in a share-based transaction.

While each of these strategic priorities could individually help to close the valuation gap, success requires decisive action across all five fronts.  

“Rio Tinto has differentiated itself through delivering growth across its core commodities," concludes Whiteside. "While the pace of investment may have been accelerated, the company has a few options to adjust capital allocation and control spending; choices that could help quickly close the current valuation discount.”