Trading Strategies: why I think this mining stock is undervalued

New record highs are becoming increasingly commonplace for the FTSE 100 index. Indeed, the UK’s large-cap index has risen by 16% year to date. In doing so, it has reached numerous all-time highs and has even marginally outperformed the seemingly unstoppable S&P 500 index since the start of the year.

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Clearly, no stock market has never risen uninterrupted in perpetuity. Bull markets have always been followed by bear markets, and vice versa, with various corrections and downturns frequently cropping up along the way. This may prompt some investors to naturally determine that the FTSE 100 index is now set to decline.

Disappointing past performance

However, the index’s relative performance prior to this calendar year has been extremely poor. While it’s performing in line with the S&P 500 index this year, its 62% gain over the past five years lags its US counterpart’s rise by 33 percentage points. It has also underperformed Germany’s DAX index by 38 percentage points and is behind Japan’s Nikkei 225 index by 50 percentage points over the same period. This suggests that it may still be undervalued on a relative basis, thereby providing scope for additional capital gains.

Furthermore, the FTSE 100 index’s returns during the current bull market, which started over five years ago during the depths of the pandemic, substantially lag those of several previous bull markets. For example, in the period from the lowest point during the global financial crisis in 2009 to the index’s highest level prior to the Covid-19 crash in 2020, the UK’s large-cap index gained 102%. This is around 30 percentage points higher than the index’s gains in the current bull market.

An upbeat global growth outlook

The FTSE 100’s long-term prospects also remain upbeat as a result of its global focus amid an improving outlook for the world economy. Indeed, the blue-chip index’s members generate over 80% of their sales from abroad. This means that it is difficult to justify the index’s relative underperformance over recent years when its global focus is factored in.

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Furthermore, monetary policy easing not just in the UK but also in the US and eurozone should have a positive impact on the financial, and share price, performance of UK large-cap stocks. Given that inflation, which has proved sticky across developed economies over recent years, is widely expected to moderate over the medium term, there may be scope for further interest rate cuts that have an additional positive impact on performance.

A lack of investment appeal?

Clearly, some FTSE 100 index constituents have risen to exceptionally high levels that may mean they are now overvalued. They could prove to be a disappointment from an investment perspective, even if their financial performance is sound, since investors may have more than adequately priced in their future profit growth.

Similarly, some of today’s relatively cheap blue-chip stocks could be deserving of their low market valuations. They may, for instance, have weak balance sheets or lack a clear competitive advantage that equates to disappointing financial, and share price, performance over the coming years.

Moreover, periods of elevated volatility, potentially caused by risks such as the impact of higher tariffs, may mean that the FTSE 100 index’s performance over the coming months fails to match its rise since the start of the year.

A long-term view

However, several high-quality FTSE 100 index stocks are currently trading at depressed levels. This means that even after sharp share price rises, they could still offer a wide margin of safety for prospective purchasers.

Investors who are able to focus on such firms could generate relatively attractive returns over the long run as catalysts such as falling inflation, declining interest rates and upward reratings have a further positive impact on the index’s performance.

A discounted share price

Source: ShareScope on 4 November 2025. Past performance is not a guide to future performance.

Mining company Rio Tinto Ordinary Shares (LSE:RIO) has lagged the FTSE 100 index’s rise since the start of the year. Its share price is up by a relatively lacklustre 11% year to date, although it has risen by almost 7% in the past month alone.

From a valuation perspective, the stock appears to offer scope for further capital gains due to its potential for an upward rerating. It trades on a forward price/earnings ratio of 11.4, for example, which suggests it could be undervalued given its cyclical status amid an upbeat outlook for the world economy.

The push for net zero

Indeed, demand for commodities such as iron ore and copper is heavily influenced by the state of the economy. Falling inflation that allows for further interest rate cuts, as well as the impact of previous monetary policy easing as time lags expire, mean that an improving global economic outlook could lead to higher prices for a range of commodities. This could have a positive impact on Rio Tinto’s financial performance.

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The company’s bottom line may also benefit from the world’s continued push to achieve net zero. Steel and, in particular, copper are heavily used in renewable energy infrastructure and electric vehicles. For example, electric vehicles can require more than three times as much copper as their internal combustion engine peers. Since demand for cleaner forms of energy production and transport are likely to rise over the long run as regulatory rules become increasingly onerous, the outlook for the firm’s financial prospects may be more encouraging than its current valuation suggests.

A solid financial position

As well as its long-term growth potential, Rio Tinto also has sound fundamentals. For example, its net debt-to-equity ratio amounted to 24% at the time of its half-year results in June. In its latest financial year, meanwhile, net finance costs were covered nearly 19 times by operating profits. Both figures show that the company is in a strong position to overcome the inherent ebbs and flows of the mining industry.

The firm’s push to diversify its portfolio further enhances its investing appeal. While its financial performance is still dominated by iron ore, which accounted for 50% of its sales in the 2024 financial year, this was down six percentage points from the previous year and 10 percentage points lower than three years ago as the company continues to invest in copper and other areas. This could lead to less dependence on the price of iron ore, thereby allowing for a more consistent financial performance over the long run.

Risk/reward ratio

Of course, Rio Tinto remains a highly cyclical business. Its sales and profits, as well as its share price, could fluctuate significantly over the coming months, with the mining industry having a long track record of elevated volatility compared with other sectors. Indeed, it remains unclear exactly how risks such as increased trade tariffs, as well as potential catalysts including interest rate cuts, will interact and play out over the coming months.

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Crucially, though, the company’s share price offers a wide margin of safety, especially when compared to the wider FTSE 100 index, even after its recent gain. This suggests that the stock offers an attractive risk/reward opportunity, with its solid financial position, increasingly diverse business model and upbeat operating outlook amid the world’s push towards net zero indicating that it could prove to be undervalued.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.