Is Rio still a bargain?

In the past year, Rio Tinto has been out of favor with investors — but why?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In the past year, Rio Tinto (ASX: RIO) has been one of the few unloved top 20 companies on the local stock exchange — but why?

Investor expectations

Investors’ expectations can be the difference between a portfolio covered in red or with a lovely shade of green. Investors worried about oversupply and underdemand of commodities have forced them to look elsewhere. It’s not a surprising conclusion given that Australia’s miners have canned more than $140 billion worth of investment in the sector.

Commodity prices

Iron ore is Australia’s most lucrative export but seemingly last in shareholder portfolios. On Monday, one of China’s top five steel makers reminded investors that miners have to face a price which will be considerably lower than in previous years. Zhang Xiaogang, Chairman of Ansteel, has said he predicts a price of between US $110-US $120 a tonne in the second half of 2013. His prediction is just below Fortescue’s (ASX: FMG) bullish guidance of between US $120-US $130 a tonne.

Operational costs

We have already seen mining services companies all but disappear in recent months, citing lower mining investments and tougher contract conditions. The domestic market has been costly for Rio and with lower commodity prices, it’ll be interesting to see whether it can recover from its $3 billion loss last year.

Better alternatives?

It has to be asked, why carry the extra risk of ‘pure’ iron ore companies, or those rely so heavily upon it. Currently, Rio receives approximately 47% of its revenue from iron ore, whereas BHP (ASX: BHP) receives only 31%. It’s a bit more piece of mind for investors who are already worried. When there appears to be so much risk involved, looking at diversified business models is always a good start.

Foolish takeaway

In recent months, Australia’s ‘blue chips’ soared to record highs and an inevitable fall always loomed. Now that that some of those stocks, like Telstra (ASX: TLS), are back down at healthy prices and paying higher dividends it’s got to be asked why an investor would want the extra risk. It may be unwise to take the risk right now, particularly before we know the real impact that the falling iron ore prices will have on the mining giant.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

More reading


Motley Fool contributor Owen Raszkiewicz owns shares in Rio Tinto and BHP.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »