Rio Tinto Limited: Too much risk for no reward?

With iron ore prices falling, investors are packing their bags. Should you?

With spot prices seemingly in free fall, many investors are dumping iron ore miners such as Rio Tinto (ASX: RIO), Atlas Iron (ASX: AGO), BC Iron (ASX: BCI), Fortescue Metals Group (ASX: FMG) and Mt Gibson Iron (ASX: MGX) in anticipation of even lower prices in the near future.

So is it time to follow the crowd or buy and hold while they’re cheap? What I’ve been saying for a while is that iron ore prices are headed south and investors should take note. But if you think this is as far as it’ll go, you may want to think again.

At around $US103 per tonne, iron ore is still not at the lowest price we’re likely to witness in the foreseeable future. In fact, Goldman Sachs is predicting a commodity price as low as $US90 per tonne later this year. But it’s not alone.

Australia’s own Bureau of Resources and Energy Economics has also predicted a rather gloomy outlook for the commodity, forecasting an average of $US90 per tonne by 2018.

Although Rio can be considered a somewhat “diversified” miner, with over 90% of underlying earnings derived from its iron ore division, it makes for a tough investment case. This is despite the fact its business can remain profitable with an iron ore price of below $US90 per tonne, given its breakeven price is much lower, under $US50 per tonne.

Therefore you might not go broke holding onto Rio shares but you’ll feel the pain of a lower commodity price. So it may be best to wait on the sidelines until the company releases it half-yearly results and we can accurately gauge the effect a lower spot price.

Outside of iron ore its Aluminium, Energy and Diamonds businesses are battling to stay afloat, so it’s not as though investors would be missing out on other growth initiatives. However, after a rather impressive FY13 result from the Aluminium division, I wouldn’t be surprised if it announces another strong result in FY14. But I highly doubt it would be enough to counteract the effect of a lower average iron ore price.

3 much more REWARDING resources stocks to consider

Rio shares look to be headed south so I’d advise investors to adopt a wait-and-see approach until we get a chance to assess its half-yearly performance. However, in the meantime, there’s a number of great miners to be found on ASX.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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