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Rio Tinto Limited drops 8% in a month: Should you buy?

In the past month, the S&P/ASX 200 (INDEXASX: XJO) has been hit hard, falling 4.95%. The big banks have taken a haircut too, with Westpac Banking Corp (ASX: WBC) down 7% since August 25.

However, it’s the iron ore miners which have been hit the hardest. Rio Tinto Limited (ASX: RIO) shares have plummeted 8% in just one month, as the price of the steelmaking ingredient approaches levels nearly 40% lower than where it was at the beginning of 2014.

Rio, Australia’s biggest iron ore miner, draws around 90% of its earnings from the commodity and has an estimated breakeven price of around $US43 per tonne – lower than both BHP Billiton Limited (ASX: BHP) and Brazil’s Vale SA (ADR) (NYSE: VALE). In the first half of 2014, Rio received an average price of $US99 per wet metric tonne (FOB), meaning it was afforded a healthy operating margin, albeit lower than 2013.

However iron ore has continued to fall: reaching below $US80 per tonne. No doubt, the price falls will have a significant effect on Rio’s top line (revenue) and bottom line (profit).

Buy, Hold, or Sell?

Rio could be entering the buy zone and I’ve taken the opportunity to get myself some exposure to it, but an investment in Rio is clearly not without risk. Indeed the short-term outlook appears quite bleak and risk-averse investors should probably look elsewhere for capital gains and dividends.

For example The Motley Fool's top analyst, Scott Phillips, recently identified one cheap but growing small-cap ASX stock with a 6.3% grossed-up dividend yield which I think is a STANDOUT buy today. If you're interested in knowing its name, just click on the link below, enter your email address and we'll send you the FREE report on his top dividend stock idea for 2014 - 2015!

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Motley Fool Contributor Owen Raszkiewicz is long December 2017 $47.80 warrants in Rio Tinto Limited. 

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