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It’s more than iron ore that’s dragging the Rio Tinto share price

The Rio Tinto Ltd (ASX: RIO) share price plunged in lunch time trade but it isn’t only the falling iron ore price that’s triggering the sell-off.

Shares in our largest iron ore producer tanked 4% to a more than two-month low of $96.47 while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) rallied 0.5% at the time of writing.

It isn’t the only miner that’s underperforming. The BHP Group Ltd (ASX: BHP) share price shed 2% at $40.50 while the Fortescue Metals Group Limited (ASX: FMG) share price copped a 5.7% beating to $8.24 – making it the second worst performer on the ASX 200 after the Iluka Resources Limited (ASX: ILU).

Why Fortescue ‘s share price is faring worse

Worries about a ramp-up in supply of iron ore from the resumption of production at some of Vale’s shuttered mines is fuelling speculation that the price of the steel-making ingredient is heading under US$100 a tonne in the short-term.

Fortescue is the marginal player among the big boys and that makes it most sensitive to falling iron ore prices despite its record iron ore production numbers (which is really adding to worries about the oversupply of the ore).

But Rio Tinto has another headwind to contend with. Credit Suisse believes the stock is at a turning point and it downgraded the Rio Tinto share price to “underperform” from “neutral” as it slashed its price target to $92 from $95 per share.

Rio Tinto cops a broker downgrade

“After Rio Tinto’s strong performance YTD, we now focus on our expectation that iron ore pricing is approaching a turning point with momentum in China port inventory drawdowns slowing and supply continuing to recover,” said the broker.

“This factor, combined with a lack of meaningful valuation support, leads us to downgrade Rio Tinto to Underperform.”

The broker’s bearish call stands in contrast to the consensus “buy” rating for the stock as most analysts are looking to upgrade their earnings estimates on Rio Tinto because their assumed iron ore price is below the current spot price.

However, this may be all the more reason to dump the stock, according to Credit Suisse.

“Despite the high likelihood of further consensus earnings upgrades as the market factors in iron ore prices which continue to be ahead of estimates, we feel that history shows that, if commodity pricing momentum has already turned, then these earnings moves are lagging indicators of share-price performance,” added the broker.

Rio Tinto released a disappointing production report this week that’s also weighing on sentiment and giving investors another reason to sell.

But supporters point to its strong balance sheet, the potential for capital returns next month and ongoing strength in China’s steel output (which have been defying expectations) as reasons to stay long in the stock.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

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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