The share price of Australia's largest iron ore miner, Rio Tinto Limited (ASX: RIO) has been hammered, falling 5.3% over the past month. When a $110 billion company falls 5%, it doesn't go unnoticed.
Indeed, all manner of financial publications have been citing economists and analysts who've suggested prices could go even lower.
However some, such as ANZ commodity analyst Mark Pervan – who was quoted in The Sydney Morning Herald – believe the downwards swing in iron ore prices could be overdone.
"Markets never get it right straight away, they always overshoot on the up side and the down side, and I think we are seeing a classic example here of overshooting on the down side." He said a "perfect storm" of increased supply, weakness in the Chinese property market and steel sectors forced prices lower.
If he and other bullish analysts are correct, the price of iron ore could stabilise or even rebound in coming months. Rio's share price could follow.
Another reason why Rio could prove cheap is analyst re-ratings. When a stock suffers a sudden price drop, there is a chance it is overdone and some analysts, who forecast 12-month price targets, will upgrade the company to 'Buy', 'Overweight' or similar. To justify this, the target price usually must exceed the market's expected return.
Finally, Rio may offer investors long-term value at its current price. I am of the opinion that too many investors are focusing on the here-and-now and forget Rio has operations outside of iron ore. Sure, these have performed poorly in recent years – resulting in massive write-offs – but they are making a comeback.
Take, for example, the Aluminium division which recently swung to profit. It will benefit from efficiency improvements and ongoing demand for bauxite, alumina and aluminium in emerging nations. The Copper division will also benefit from these countries' growing middle class.
Buy, Hold or Sell?
Whilst there could be significant short-term upside potential in Rio shares at their current price, the fact is: The price of iron ore is falling and miners will experience lower revenues and profits. However, if you don't mind a high-risk/high-reward investment every now and again (Let's face it, who doesn't?) then you should take a read of a free report The Motley Fool's top analyst recently released!
