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Is this your chance to buy Rio Tinto Limited while it’s cheap?

In early trade today the S&P/ASX 200 (INDEXASX: XJO) was trading more than 1% down, following leads from the US.

However iron ore giant Rio Tinto Limited (ASX: RIO) has fallen even harder (down nearly 2%) as the price of the steelmaking ingredient fell (again) overnight and investors continued to react to the broader market sell-off.

Since the beginning of the year, shares in Rio have fallen over 11% whilst the broader market, thanks to today’s losses, is down 0.5%.

Undoubtedly the price falls will leave some investors wondering if now is an ideal time to pick up a bargain.

Before considering buying shares, it should be noted that Rio’s top line will suffer from the sliding iron ore price, which hit just $US78.60 per tonne last night (down from over $US130 per tonne in January). Although Rio is ramping up production from its Pilbara mines and the Australian dollar is dropping, it won’t be enough to completely offset the losses.

It means the current sell off could be justified and those looking for short-term capital gains or dividends would be wise to avoid the stock. Indeed the medium term could also prove a tough trot for investors, especially if coal and copper prices continue to fall.

However, over time, other commodities will take iron ore’s place. I expect the group’s Aluminium, Energy and Copper divisions to grow strongly in coming years, as CEO Sam Walsh’s cost cuts take effect and commodity prices stage a comeback.

Buy, Hold, or Sell?

I expect Rio to become a leaner, more diversified and profitable business over the long term. However with iron ore – a commodity which contributes 90% of group earnings – falling dramatically in recent times, its short-term future doesn’t look pretty. So if you want a reliable dividend stream or plan to invest for less than five years, stay away from Rio shares because it’ll take time for the company and investors to adjust to a lower commodity price environment.

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

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