There is perhaps no Warren Buffett quote more famous than, "Be fearful when others are greedy and greedy when others are fearful."
At the moment, shareholders in iron ore miners would be ready to sell out of fear of further losses. But should they be?
With the iron ore spot price falling to below $US100 per tonne, shares in Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) have been hit hard. Down 12%, 2% and 25% since the New Year, respectively.
But is now the right time to sell your Rio Tinto shares? Even with a spot price of below $US100 per tonne, Rio is still profitable. In fact, it can dig up and ship high quality iron ore to customers for under $US50 per tonne.
In addition, since the iron ore spot price is nearly at a level which is equal to even the most bearish analyst forecasts of $US80 per tonne, the worst share price falls could be behind it. As fellow Motley Fool Contributor Tim Roberts pointed out, the lowest share prices are generally reached when "all the bad news is on the table."
The problem for Rio Tinto is its lack of diversification and troubled past. Compared to BHP which has much larger earnings contributions from its less profitable commodities such as copper, petroleum and coal, Rio's aluminium and copper businesses contributed a combined total of only $1.37 billion to 2013's underlying earnings, whereas iron ore accounted for $9.858 billion.
In addition, continuous write-downs over the past eight years have destroyed shareholder wealth and Rio currently has $US18.1 billion in debt.
To sell or not to sell
With many analysts and forecasters tipping iron ore will average just $US80 per tonne by 2018, it appears Rio's days of huge profit margins are behind it. In the coming year, Rio's increased production will be not be enough to offset a fall in spot prices which could put further downwards pressure on its shares. However picking short-term fluctuations in share prices is a mugs game.