Investing in blue chip resources stocks such as Rio Tinto Limited (ASX: RIO) isn’t without risk. Despite their size, scale and huge production they too can fall victim to the numerous uncertainties within the sector.
In fact, since the beginning of 2014, all the major iron ore miners have fallen. Rio, BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) are down 12%, 3% and 23% respectively. In that time the S&P/ASX200 (ASX: XJO) (^AXJO) has climbed 3%.
The catalyst behind Rio’s fall has been attributed to a lower iron ore spot price. Since the steelmaking ingredient accounts for over 90% of the miner’s earnings, it’s easy to see why.
Over the weekend iron ore slid to just $US91.80 per tonne, a far cry from the $US135 per tonne at the beginning of the year. But it appears it could go even lower in the long-term with the forecast oversupply and falling Chinese demand expected to worsen in coming years.
But has it already been priced in?
Over the years, Rio has been a serial underperformer and complete destroyer of shareholder wealth. Since the disastrous acquisitions of both Canadian aluminium miner Alcan in 2008 and Mozambique coal producer Riversdale Mining in 2011, Rio’s announced billions of dollars of write downs and, as a result, its shares have performed dismally.
So it’s no wonder why its shares now change hands at only eight times forecast earnings per share. An unimpressive past with an uncertain future makes for a tough investment case.
However thanks to an increasing production of iron ore and significant earnings growth from the group’s aluminium division in 2013, some investors may be getting excited by the miners current share price and view it as an opportunity to buy in cheap. I’m not so bullish.
To buy or not to buy
Until we can get a clearer picture of the effects the lower iron ore price is having on earnings and an updated report on the performance of the company’s energy, copper and aluminium divisions, I believe it’s not worth the risk. Adopting a wait-and-see approach to Rio shares mightn’t make you money, but it sure won’t lose you any!