As Australia's biggest iron ore miner, Rio Tinto Limited (ASX: RIO) seems to have a lot to offer its shareholders. Trading on a price-to-earnings ratio of just 8, it appears too good to be true.
However the number one problem facing Rio's shareholders is clear cut, unavoidable and outside the control of its management. It is: falling iron ore prices.
Compared to the more diversified BHP Billiton Limited (ASX: BHP), Rio has a much greater dependence upon the steel making ingredient and, along with pure-play miner Fortescue Metals Group Limited (ASX: FMG), has been on the receiving end of investors' bearish sentiment. In the past three months shares are down over 14%, while the S&P/ASX 200 (ASX: XJO) (^AXJO) has risen 0.2%.
This comes despite a rather strong 2013 performance from the group's iron ore and aluminium divisions and on the back of a recent production record at its Pilbara operations. Obviously, investors believe the miner's ambition to produce 360 million tonnes per annum (Mtpa) of iron ore by 2018 isn't enough to counteract the 26% fall in iron ore prices since November 2013.
And it's easy to see why many investors don't have faith in the miner's management. Since the disastrous acquisitions of both Canadian aluminium producer Alcan and then Mozambique coal miner Riversdale Mining only a few years later, shareholders have been forced to watch as tens of billions of dollars have been written off its balance sheets.
So although Rio may appear cheap, I believe its shares could still be slightly overvalued in the short to medium terms. Unlike a missed earnings guidance or product recall, Rio appears to have little ability to turn its fortunes around in the near future. With over 90% of its underlying earnings derived from iron ore and a huge supply glut tipped only to get worse in the next three years, it appears Rio is up against it.
