Why did the Rio Tinto share price struggle in the September 2021 quarter?

Rio Tinto shares have been struggling in the last few months. What’s going on?

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In the quarter for the three months to 30 September 2021, the Rio Tinto Limited (ASX: RIO) share price has been struggling. What has been going on?

The September 2021 quarter represents the third quarter of Rio Tinto’s financial year because its financials align with the calendar year.

Between 1 July 2021 and 30 September 2021, Rio Tinto shares fell by just over 20%.

A few days after reporting its half-year result, the Rio Tinto share price actually reached a peak of $134.40. So, up until early August, it had actually risen during the quarter.

FY21 result

That half-year report actually included a lot of growth. Net operating cash generated jumped 143% to US$13.66 billion. Underlying earnings went up 156% to US$12.17 billion. Free cashflow surged 262% to US$10.18 billion. Reported net earnings soared 271% to US$12.3 billion.

All of that growth allowed the board to declare a total dividend per share of US$5.61 for the result, an increase of 262%. That included a special dividend per share of US$1.85.

Of the total underlying earnings, Rio Tinto generated US$10.2 billion of that from iron ore. The other two sizeable contributors were aluminium (US$921 million of net earnings) and copper (US$885 million of net earnings).

As readers can see, iron ore plays a big part in the profits (and dividend) of the business.

Looking at the six months to 30 June 2021, Rio Tinto said that the average realised price for its iron ore increased 97% to US$168.4 per dry metric tonne.

So, what may be hurting the Rio Tinto share price?

Whilst the miner benefited from the rising iron ore price during the first half of 2021. It appears to be suffering from the reversal of strength of iron. The iron ore price has roughly halved between May 2021 and now.

All things being equal, the lower iron ore price likely means Rio Tinto can’t generate quite as much profit.

Analysts may point to lots of different reasons for iron weakening such as the Evergrande crisis in China, steelmakers in China being told to reduce production and higher production coming back online in Brazil.

The iron ore price is certainly not at the lowest price it has been over the past decade, but it’s materially lower than where it was a few months ago.

What could help the Rio Tinto share price in the future?

Commodities like iron ore often move in cycles. Peaks and troughs could continue for iron ore.

Rio Tinto is also looking to diversify its earnings.

On 27 July, the board committed $2.4 billion of funding for the Jadar lithium-borates project in Serbia, one of the world’s largest greenfield lithium projects, subject to receiving all relevant approvals, permits and licences.

This lithium asset is expected to operate in the first quartile of the cost curve, with a 40-year mine life. First saleable production is expected to take place in mid-2026 at a time of strong market fundamentals with lithium demand forecast to grow 25% to 35% per year over the next decade.

Following ramp-up to full production in 2029, the mine is expected to produce approximately 58,000 tonnes of battery-grade lithium carbonate, 160,000 tonnes of boric acid and 255,000 tonnes of sodium sulphate annually.

Rio Tinto said that Jadar could supply all the necessary lithium to power over one million electric vehicles per year.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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