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Rio Tinto Limited falls below $63 per share: Is it a buy?

What: In early afternoon trade, shares in mining giant Rio Tinto Limited (ASX: RIO) have continued their recent downwards trajectory falling 0.71%, or 45 cents, to below $63 per share.

So what: Rio, our biggest iron ore miner, has been hit hard by a falling iron ore price and thanks to the steelmaking ingredient accounting for 90% of the miner’s profits, it’s easy to see why. However, Rio hasn’t been the worst affected iron ore miner.

Those with much higher production costs, such as Fortescue Metals Group Limited (ASX: FMG) and Atlas Iron Limited (ASX: AGO) have fallen hard in 2014. The miners, which have estimated all-in costs of $US70 per tonne and $US80 per tonne respectively, have lost over 30% in share price this year alone. This as the iron ore spot price approaches multi-year lows.

Overnight it fell to just $US86.70, leaving little, if any, profit margin for higher cost Australian producers.

However, Rio and BHP Billiton Limited (ASX: BHP) have little to worry about with a spot price in the mid-80s. They have breakeven costs of approximately $US43 and $US45 a tonne, respectively. They are also more diversified.

In recent years, Rio’s other operating divisions such as Energy (Coal, Uranium etc.) and Aluminium (Including Bauxite, Aluminium and Alumina) have weighed on earnings. In the coming year that trend could reverse with CEO Sam Walsh and his senior management team doing an excellent job of reigning in costs.

Buy, Hold or Sell?

I think Rio Tinto is a good long-term buy and hold for those wanting exposure to the resources sector. In coming years, management has hinted it will “materially” increase returns to shareholders. With lower costs, reduced capex, falling debt, cheap shares and excellent margins, I think it’s a good buy.

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Motley Fool Contributor Owen Raszkiewicz is long Dec 2017 $47 Warrants in Rio Tinto Limited. 

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