The iron ore price has continued to rise, could this mean that the Rio Tinto Limited (ASX: RIO) share price is an opportunity?
Well, the market has certainly noticed. Since the start of 2022, Rio Tinto shares have gone up by around 23%.
Does a higher iron ore price make Rio Tinto shares a buy?
Commodity businesses are very dependent on the price of the commodity. If the price goes up then it can add to profitability. But if prices fall then it can be very detrimental to profit because it still costs around the same to extract that commodity from the ground.
But at the moment, iron ore is going up. On Friday, Commsec noted that iron ore had gone up 4.8% to US$153.75 per tonne. In the middle of November 2021, the iron ore price had fallen below US$90 per tonne.
Rio Tinto is expected to report a strong result for FY21 after revealing triple-digit profit growth in the half-year result. Those half-yearly numbers saw free cash flow rise 262% to US$10.2 billion, underlying earnings grew by 156% to US$12.2 billion and the total dividend jumped by 262% to US$5.61 per share.
It recently released its fourth-quarter production result, showing that 2021 iron ore production was down 4% to 319.7 mt. Aluminium production was down 1% to 3,151 kt and mined copper production was down 7%.
But FY21 is the past. Share prices are normally forward looking. Is the Rio Tinto share price an opportunity for FY22?
Expectations for 2022
Commsec numbers currently suggest that Rio Tinto is going to generate $12.88 of earnings per share (EPS) in 2022. With that, the mining giant is expected to pay a dividend of $9.79 per share, which translates into a grossed-up dividend yield of 11.4% at the current Rio Tinto share price.
It's hard to say what the iron ore price is going to do next. Some analysts like UBS were expecting the iron ore price to languish at around US$80 by now, or at least get there in the shorter-term.
But the iron ore price has soared.
Price targets
UBS still rates the Rio Tinto share price as a sell, with a price target of $90. Plenty of other brokers' ratings are currently a buy like Macquarie's and Morgan Stanley's.
But Rio Tinto shares have actually run ahead of some price targets, like Morgan Stanley's target of $109. Macquarie has a price target of $130 on Rio Tinto, suggesting a single-digit upside for capital growth over the next year.
Lithium expansion?
Analysts have noted the disappointing news that the Serbian government has blocked Rio Tinto's exploration licences for the lithium project for Jadar because of environmental concerns.
However, it has diversified its lithium diversification attempt by buying the Rincon lithium project in Argentina for $825 million, which is a large undeveloped lithium brine project in the Salta Province of Argentina.
