Shares in powerhouse iron ore miner Rio Tinto Limited (ASX: RIO) have been hammered since the start of 2014, down 11% compared to a near 3% gain in the S&P/ASX 200 Index (ASX: XJO) (^AXJO). However, could this be the opportunity investors have been waiting for?
To answer this question we’re required to think and act objectively because, thanks to a tumbling iron ore spot price, a lot of media attention has been focusing on the imminent oversupply and softening demand for the steelmaking ingredient. It’s fair to say investors’ desire for iron ore stocks is pretty low.
The following graph shows the monthly iron ore spot price over the past five years with black arrows pointing to prices in the month of May.
As can be seen, the iron ore price has fallen in the month of May for four of the past five years.
As highlighted by Motley Fool analyst Mike King, since the beginning of 2014, iron ore has fallen from over US$135 per tonne to US$97.50 per tonne and this is significantly affecting junior miners such as Atlas Iron Limited (ASX: AGO) and Mount Gibson Iron Limited (ASX: MGX), down 37% and 24% respectively. These miners have higher breakeven points and are thus more susceptible to lower spot prices.
Although BHP Billiton Limited (ASX: BHP) and Rio have much lower costs (due to their scale, technology and key infrastructure) and have forecast lower prices, they too are not immune to falls in commodity prices.
In the last two years Rio has been pushing to cut $US3 billion of costs and paid off debt to a more manageable level in anticipation of lower prices. However the quicker-than-expected falls will make capital management (dividends, debt repayments etc.) more difficult in coming years.
To buy or not to buy
Even though Rio continues to ramp production it’ll not be enough to counteract the fall in spot prices. Even though I believe the iron ore price could well trade above $US100 per tonne in the near future (particularly if the Chinese government rolls out another stimulus package) I’m not willing to put my money on it. Instead I’m focusing my attention on other high-yielding growth stocks which carry a lot less risk.