The Rio Tinto Ltd (ASX: RIO) share price has seen plenty of volatility, but despite the recovering valuation it could still be an underrated buy.
The ASX mining share does not produce oil or LNG, but the Middle East impacts may well have an effect on Rio Tinto's earnings.
I think the market may be underestimating the company for the following reasons.
Electrification commodities
The business has worked hard at building its exposure to both copper and lithium in the last few years, which may turn out to be a very smart move.
The last year and a half has seen the world, particularly the US, move away from efforts to electrify (and decarbonise). However the last several weeks has shown how petrol/diesel-powered vehicles are exposed to fuel supply and potential problems that can occur when there's uncertainty relating to Russia or the Middle East.
Copper and lithium are essential for things like electric cars, electric trucks, large-scale batteries, renewable energy and so on. The Middle East events could certainly increase demand for electrification commodities.
I think Rio Tinto's strategic moves here will bear significant financial fruit for the company over the next few years.
Aluminium
Rio Tinto may be best known as an iron ore and copper miner, but there are other commodities in its portfolio that do play an important part. Aluminium is one of the resources that the ASX mining share also produces.
Unfortunately, the ongoing conflict has led to a number of commodity infrastructure assets being targeted in the Middle East. Perhaps surprisingly, the Middle East is an important source of aluminium, producing around 9% of the global supply.
Not only have the Middle East nations not been able to ship their commodities out of the Strait of Hormuz, but production facilities were recently hit.
Aluminium Bahrain runs one of the world's largest smelters, but was recently hit in a Iranian strike, while another large aluminium producer in the UAE was also hit.
The aluminium price reportedly jumped 6% after these developments. Rio Tinto's operations will play an important role in continuing to supply the world with aluminium in the coming months and years.
Iron ore
The final area I want to highlight is iron ore, which has seen the iron ore price increase to US$106 per tonne.
That's certainly not the highest price it has been this decade, but it's a lot stronger than what analysts were expecting.
If the high cost and diesel (and reduced availability) increases production costs, then it could lead to a reduction in global production and provide further support to the iron ore price.
In the longer-term, there is a possibility that increased production from Africa could be a headwind for the iron ore price. While that wouldn't be a boost for Rio Tinto, the ASX mining share is a key component of the African iron ore supply because it's a major shareholder in the new Simandou mine.
In other words, Rio Tinto's iron ore earnings could remain strong and continue making good profit.
While this isn't necessarily the best time to invest in the Rio Tinto share price because it's already up 32% in the last six months, I think its earnings remain on a good trajectory, and may be underrated by the market.
The post 3 reasons why the Rio Tinto share price could be a buy appeared first on The Motley Fool Australia.
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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