The shares of London’s leading mining giant Rio Tinto (LSE:RIO) haven’t had a terrific year, so far, but that’s also sent the dividend yield flying to 7%.
The stock’s down over 16% since January and is now trading close to 4,950p. Yet this has come off the back of a pretty stellar period of sky-high commodity prices. The metals and mining sector has always been cyclical. But as technologies such as electric vehicles (EVs) and energy infrastructure increase, long-term demand for Rio Tinto’s products looks exceptionally robust.
So is the recent share price weakness a no-brainer buying opportunity for long-term investors to consider?
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What’s behind the falling share price?
As a natural resources business, Rio Tinto has no pricing power. As such, its revenue and profits are highly sensitive to fluctuations in the market price of metals. Based on the group’s current production capabilities, the price of iron ore’s primarily driving earnings. And sadly, the price per tonne has fallen from around $131 to $102 over the last 12 months.
Pairing lower prices with missing production volume targets for iron doesn’t exactly create confidence among investors. So with that in mind, it’s not surprising the stock took a double-digit tumble, dragging its forward price-to-earnings ratio down to 8.6. That’s now lower than quite a few of its rivals, such as Glencore and Anglo American. So are Rio Tinto shares now too cheap?
Long-term outlook
Demand for iron isn’t likely to disappear anytime soon. It’s the critical ingredient for steel, which is used worldwide in almost every industry. However, management’s been eager to try to reduce its dependence on metal by diversifying into other high-demand materials, most notably copper and lithium.
Both of these materials are critical to modern-day electronics and technology. And the general consensus is that the current global supply won’t be able to keep up with expected long-term demand. In other words prices for both materials could see prices steadily climb over the coming years.
Copper is already a small part of Rio’s production portfolio. Meanwhile, the group’s first lithium mine’s expected to join the show before the end of 2024, with plenty more prospective projects in the exploration and development pipeline.
In other words, the firm seems to be getting well-positioned to meet the expected long-term demand. And with Western governments ramping up investments into energy infrastructure as well as digitalisation, Rio Tinto could soon enjoy a far more favourable operating environment with a better product mix.
Time to buy?
There’s a lot to like about Rio Tinto, especially for investors operating on a long time horizon. However, personally, it’s not a business I’m rushing to buy even at today’s admittedly cheap-looking price and attractive dividend yield.
Even with the progress made in diversifying its product portfolio, it could be several years before earnings aren’t almost entirely driven by iron ore prices. Beyond this single asset risk, mining regulations are becoming increasingly strict in regions where Rio Tinto operates, due to the environmental impact.
Consequently, the cost of extraction looks like it’s set to go up, suggesting that profit margins are likely to come under pressure and, with it, dividends. Having said that, investors seeking exposure to the mining sector may want to consider taking a closer look.
