Is your money safe in Rio Tinto Limited?

At time of writing, shares in mining giant Rio Tinto Limited (ASX: RIO) have fallen 0.9% as the broader market sell-off continues.

So far in 2014 Rio, Australia’s biggest iron ore miner has fallen nearly 13% as the market reacted to falling commodity prices. With 90% of group profit derived from iron ore, a steel-making ingredient, it’s little wonder why Rio shares have failed to beat the market.

Last week, the spot iron ore price fell below $US79 per tonne whereas at the beginning of 2014 it was fetching more than $US130 per tonne, almost 40% more than it is today.

The price fall is bad news for Rio shareholders but it is terrible news for investors who hold shares in junior or mid-tier Australian producers, who have breakeven prices ranging from anywhere between $US70 per tonne to well over $US100 per tonne. Already we’ve witnessed some of them go broke.

However, Rio’s Pilbara iron ore operations are said to be among the lowest-cost in the world, thanks to its world class supply chain and proximity to Asia. What’s more, unlike those of Fortescue Metals Group Limited (ASX: FMG), the mines produce a high-quality ore, thus attracting the best possible price.

In addition, the group does hold upside potential in its Copper, Aluminium and Energy divisions. However, given their low contribution to overall group revenue, their performances wouldn’t be anywhere near enough to offset the falls in iron ore.

Buy, Hold, or Sell?

Unless you’re investing for the ultra-long term and can stomach volatility, don’t buy Rio Tinto shares and avoid smaller, higher-cost producers altogether. Whilst we could see a rally in iron ore miners before year’s end, I wouldn’t be prepared to bet on it.

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

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