Why surging aluminium prices are a double-edged sword for the Rio Tinto Limited share price

The outlook for aluminium has brightened considerably with the price of the commodity hitting a multi-year high. This should be good news for the share price of Rio Tinto Limited (ASX: RIO) but it’s instead giving the miner a big headache.

The price for aluminium has been surging after the US imposed sanctions against Russian producer of the lightweight metal, Rusal, and various uber-rich Russian individuals.

Rio Tinto would normally be a beneficiary of the higher metal price as it owns aluminium producing assets from its US$38.1 billion takeover of Alcan in 2007, but most of the miner’s aluminium operations are in partnership with Rusal.

No one can afford to ignore the US sanctions as anyone in breach will be cut off from the global banking system that is effectively controlled by the US, and Rio Tinto is no exception.

This has prompted the mining giant to issue a statement stating that it is reviewing its partnerships and arrangements it has with “impacted entities”. This suggests that Rio Tinto has more than one Russian lover it is in bed with.

The miner also said it will declare force majeure on certain contracts and is working with its customers to minimise the disruption.

This explains why Rio Tinto’s share price is only up 0.3% at $78.46 in morning trade when fellow aluminium producer South32 Ltd (ASX: S32) is surging 3.7% to $3.61 and Alumina Limited (ASX: AWC) is 3.1% stronger at $2.67.

Rio Tinto’s gain isn’t even keeping pace with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, which is 0.5% stronger.

It will likely take a bit of time for Rio Tinto to unwind itself from its Russian links as its Russian bedfellows will probably want to extract what they can before cutting ties.

This means Rio Tinto may not end up partaking in the aluminium price fest for a while yet. It could also complicate its attempts to divest its aluminium business.

The miner’s political headaches don’t end there. Mongolia has arrested its former Prime Minister for corruption and the former leader had been instrumental in Rio Tinto’s investment in the giant Oyu Tolgoi mine.

I am not sure how Rio Tinto or its executives could be dragged into this but it’s another area shareholders will need to pay close attention to.

I am still a bull on Rio Tinto, at least for now. The good news is that around 50% of the US$40 billion revenue it posted in 2017 comes from iron ore – and the miner is a leader in this space with its long-life, low cost, and high-quality assets.

In contrast, aluminium makes up 27% of revenue, according to the miner’s statistics. This is still a significant chunk of its earnings and I would guess that management will be focusing most of its energy on extracting itself from the Russian sanctions.

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Motley Fool contributor Brendon Lau owns shares of Rio Tinto Ltd. and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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