Shareholders in iron ore giant Rio Tinto Limited (ASX: RIO) have had a start to the 2014 year which they'd rather forget. But the question is: Will they?
So many times investing becomes a short-term affair. With the price of iron ore seemingly in free fall, Rio is already down 13% this year. However Rio shareholders are not alone. Shares in Vale Inc. (NYSE: VALE), Fortescue Metals Group Limited (ASX: FMG) and the more diversified BHP Billiton Limited (ASX: BHP) are down 15%, 28% and 4.5%, respectively.
So could now be the opportunity you've been waiting for?
Unfortunately, miners dependent on a single commodity expose their shareholders to risks which they have no control over. Each of the companies above derive a major portion of their earnings from iron ore which, thanks to a fall from over $US135 per tonne at the beginning of this year to below $US90 per tonne, has proven to be undesirable.
Significant production increases have, and will, see the supply of the steelmaking ingredient substantially outweigh the demand from countries such as China (in the near future).
Rio, the world's second largest producer, drew more than 90% of earnings from its iron ore division in FY13. Depressed aluminium prices and woes in the Energy business (where coal and uranium are found) also continue to hinder its performance.
"What about Copper?" I hear you say.
Whilst Rio's medium to long-term saviour could be its growing Copper division, its contribution to group revenues is still relatively small compared to the iron ore business. However with a number of promising projects and Joint Ventures (JV) in production (for example Escondida, Kennecott, Oyu Tolgoi and Grasberg) the potential to grow its Copper operations represents a viable long-term growth prospect, and shareholders should be aware of the possibility.
To buy, or not
Rio has a history of disappointing the market. Year after year, write-down after write-down. However, since we are savvy long-term investors, it's important to remember the bigger picture. Whilst Rio's short-term outlook may be bleak, in the long term it appears to have many avenues to pursue growth. Whilst it may be tempting at its current low price, I don't think it's a 'BUY' right now but there will come a time when it is.
