Rio Tinto (LSE:RIO) shares have demonstrated considerable volatility in recent months. That’s largely because minings stocks are cyclical and their share prices rise and fall in line with economic forecasts.
But Rio Tinto is a diversified miner, so in theory, it is more insulated from developments in the global economy than peers that concentrate on a sole commodity — such as gold.
So, let’s take a closer look as to whether Rio Tinto would have been a good investment one year ago, and whether it could be a good buy today.
A volatile year
Over the past 12 months, the Rio Tinto share price has bounced up and down amid varying economic forecasts.
So, if I had bought £1,000 of Rio Tinto shares a year ago, today I’d have £900 plus dividends, as the stock is down 10% over a year.
The miner is one of the strongest dividend payers on the FTSE 100. In fact, in terms of a total payout, a year ago, it was forecast to be the largest dividend payer — paying out £7.4bn.
Over the past year, I’d have received around £60 in dividends from my £1,000 of Rio Tinto shares.
So, in terms of total returns, I’d be down £40. That’s clearly not ideal.
Market forces
The price of commodities produced by minings stocks rises and falls on supply and demand forces. Focusing on demand, macroeconomic and microeconomic forecasts both have a sizeable impact.
While Rio is more diversified than some other mining stocks, it is heavily focused on iron. In 2022, iron accounted for almost 70% of underlying EBITDA. The steelmaking ingredient is vital to the global economy but its demand is often linked with broader economic trends. That’s because steel is integral for infrastructure development.
The price of iron ore hit record highs of more than $210/tonne in June 2021, but fell below $100/tonne in July 2022 as the global economic forecast deteriorated.
What about now?
Today iron ore is trading around $120/tonne. Where could it go next? Well, there’s no clear answer. Bank of America suggested the price could push upwards to $150/tonne in the coming months.
The analysts cited fairly low port inventories, low stockpiles at steel mills, seasonally strong demand for steel and production and “underwhelming” shipments out of Brazil, as the reasoning for this.
But that view isn’t universally held, and UBS has a sell rating on the miner.
Personally, I don’t have a thesis on where the global economy will go next and what will happen to iron ore prices — it’s all very changeable. Although, I’m broadly concerned about the impact of a hard landing for the global economy if inflation remains sticky — this is something the IMF has warned about.
Rio Tinto is clearly attractive with a dividend yield of 7.5% and trading at just 8.5 times earnings. But, on this occasion, I think there are stronger and clearer investment opportunities elsewhere, including in the banking sector.
I am bullish on long-term demand for commodities, so if we see further downward pressure on the share price, maybe I’ll see that as a better entry point.
