A 6.7% yield but down 14%! Is it time for me to buy more of this FTSE passive income gem after it upgrades strategic targets?

This FTSE commodities giant aims for higher production of materials needed in ongoing urbanisation and for the energy transition, so should I buy more now?

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FTSE 100 commodities giant Rio Tinto (LSE: RIO) has been out of favour with the markets for a while now. This has been in line with the uncertainty of China’s economic bounce-back from its Covid years.

That said what many in the markets appear to overlook is that the country still accounts for 40% of global commodities demand. It also achieved 5.2% economic growth last year against its 5% target.

On Monday (9 December), China’s government pledged “more proactive” fiscal measures and “moderately” looser monetary policy next year to further stimulate growth.

Rio Tinto’s core strategy has positioned it to be in a prime position to benefit from this. And it also places it front and centre to profit from the broader global shift to greener energy.

The key risk in my view for the firm is a stalling or reversal in China’s economic growth. Another is that the same happens to the global energy transition.

Upgraded long-term growth strategy

At its 4 December investor seminar, Rio Tinto reiterated its new strategy of investing for a stronger, more diversified and growing portfolio. This aims at ensuring the long-term delivery of attractive shareholder returns.

More specifically, it targets major production increases in copper, iron ore, and lithium in the coming years. For copper, it aims to raise annual output from the current 660,000 tons-720,000 tons to 780,000 tons-850,000 tons by 2025. By 2030, it targets 1,000,000 tons a year of production.

The firm also projects a 5m tons annual increase in its iron ore production to the end of 2025 from the current 323m tons-328m tons.

And the 9 October $6.7bn purchase of Arcadium Lithium means that Rio Tinto now controls the world’s largest lithium resource base.

Copper is a key product in the energy transition sector and in construction. Iron ore is the core material for the steel used in wind turbines, solar panels and electric vehicles. And lithium is a key component in batteries used in electric vehicles, phones, and computers. It also has a vital role in the storage of wind and solar power.

Consequently, all three commodities could see strong demand from ongoing industrialisation and urbanisation, especially in emerging markets. But they are also likely to strongly benefit from the boom in energy transition projects in emerging and developing markets, in my view.

Will I buy at the current price?

I already own Rio Tinto shares, but this does not preclude me from buying more if the price is right.

To cut to the chase on this, I ran a discounted cash flow analysis of the stock, using other analysts’ figures and my own.

This shows the shares to be 26% ‘undervalued’ at the current price of £50.92. So the fair price for them would be £68.81. Market vagaries might move them lower (or higher), but they look cheap to me at this level.

Additionally positive for me is the 6.7% annual dividend yield they pay now. It compares very favourably to the 3.6% FTSE 100 average.

Therefore, given what I think are very solid growth prospects, an undervalued share price and an excellent yield, I will be buying more Rio Tinto shares very soon.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Simon Watkins has positions in Rio Tinto Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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