Rio Tinto Limited down 12.5%: Is it time to buy?

Could shares have reached their bottom and be about to rebound?

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So far in 2014, Australian iron ore miners have been hammered. Their share prices had, until this week, been seemingly in freefall as the spot price of the steelmaking ingredient plummeted. Down from $US135 per tonne at the beginning of 2014 to as low as $91.80 per tonne last week.

Even our biggest and lowest cost producers such as Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) haven’t been immune to the falls. Down 12.5%, 4.6% and 21.6% since January 2 2014, respectively.

The problem for Rio is its dependence on iron ore for over 90% of earnings and despite a goal to progressively up production to 360 million tonnes per annum by 2018, it’ll unlikely be enough to offset lower spot prices in the short term. But, given its huge falls, could we now be about to witness a turnaround from our biggest iron ore miner’s share price?

Rio’s CEO, Sam Walsh, seems to think it could happen. Compared to investment bank Golden Sachs, who expects an average iron ore price of $US80 per tonne in 2015, he suspects an iron ore price, “somewhere north of $US100 is probably more realistic.” As reported by Bloomberg recently.

He also noted: “We are the lowest-cost producer in the world, with costs of $US20 per tonne compared to the price of around $US92 a tonne; I think we’ll be OK… I don’t think we’re going to go down to $US80 or else a lot of my friendly competitors are going to disappear.”

But Goldman Sachs aren’t the only ones forecasting lower iron ore spot prices, around this time last year Macquarie Group Ltd (ASX: MQG) said they expected it to average just $US88 per tonne in coming years. The Bureau of Resource and Energy Economics – Australia’s official resources forecaster – said they too expect the price to average just $US80 by 2018.

If, in 2015, the iron ore price averages just $US80 per tonne, Rio’s share price may fall even further, especially if its aluminium and energy businesses continue to perform poorly.

A chance to make a quick profit

As I recently noted, predicting the direction of the iron ore spot price is a mug’s game but over the past 5 years, during the month of May, it has fallen every time. Could the falling prices be a cyclical downwards trend which is about to reverse? Or is it likely to persist for many years to come?

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