Rio Tinto Limited jumps 3%: Is it time to buy?

Overnight the price of iron ore jumped 4.9% to $US84.17 per tonne, rebounding from prices lower than $US80 just last week. A surprisingly strong Chinese trade performance in September has spurred the jump and eased fears of a slowdown in the super-sized economy.

As a result, the share prices of Australian iron ore miners have climbed higher in early trade today.

However after a dismal performance so far in 2014, shareholders in smaller iron ore miners, will see it as little consolation – Atlas Iron Limited (ASX: AGO) and Mt Gibson Iron Limited (ASX: MGX) are down 66% and 54%, respectively, this year alone.

But today is a different day and Australia’s biggest and best iron ore miner, Rio Tinto Limited (ASX: RIO) jumped over 3% before midday on the news of higher spot prices, whilst BHP Billiton Limited shares (ASX: BHP) were up 2%.

So should investors be positioning themselves for a revival of the iron ore miners’ share prices?

Perhaps unsurprisingly, for risk-averse investors, I believe the answer is no.

It doesn’t take an analyst to know that the increased supply coming online in the next few years will put downward pressure on the price of iron ore. Especially when coupled with potentially falling demand from Chinese mills.

However some investors (myself included) who are willing to accept a little extra risk, might be wondering if now is a good time to invest in Rio for the long term. After all, it is the world’s premier low-cost iron ore producer, with a breakeven price estimated at $US43 per tonne. That leaves a great profit margin for the miner and allows it to generate huge cash flows.

Therefore it could outperform the market in the long term. However I believe it’d require a larger input from its other operations such as energy, copper and aluminium. In recent years, these divisions have hindered the group’s performance.

One interesting point to note is, despite a resources slowdown and falling commodity prices, Rio’s share price has only fallen 2.7% in the past 12 months. For comparison, BHP, Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) have fallen 5.4%, 3% and 8%, respectively.

Buy, hold, or sell?

There are better buying opportunities (see below) for risk-averse investors than Rio. However with an emphasis on increasing dividend payments to shareholders, lower debt and an incredibly low-cost of production, Rio would be my first choice among the iron ore miners.

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Motley Fool Contributor Owen Raszkiewicz is long December 2017 $48.11 warrants in Rio Tinto. 

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