The Rio Tinto Limited (ASX: RIO) share price looks like an opportunity worth digging into, in my opinion.
This massive mining business has seen much volatility over the last six months. Certainly, resource businesses are known to be cyclical as resource prices move up and down regularly. When the price of a commodity changes, it heavily impacts the current profitability of the business.
Remember, it costs roughly the same to produce one mt of iron ore whether the iron ore price is at US$100 per mt or US$150 mt. That's aside from higher payments to the government at higher prices. A higher commodity price can largely fall to the net profit after tax (NPAT) line of a miner's financials.
But, the same is true when resource prices fall – it significantly hurts the potential profit making of the miner.
We don't know when resource prices are going to rise or fall. But I believe that it can be an opportunity to consider the shares of that miner when both the resource price and share price fall. Bear in mind though that a company isn't necessarily a 'buy' just because its share price has fallen. However, if an investor is interested in owning shares, I think it makes sense to buy when the price is lower and sentiment is weaker.
I think the Rio Tinto share price is looking attractive
Over the past six months, the Rio Tinto share price has sunk around 20%. For such a big business, that's a hefty fall.
It probably won't be surprising to know that iron ore and copper prices have both fallen in the ballpark of a 20% (ish) drop as well, over the same time period.
Will those commodities keep falling? Possibly.
But, the Rio Tinto share price and iron ore price may not move in tandem throughout the rest of this cycle. Share markets are forward-looking, so some investors may make predictions of where they believe the iron ore price will settle and where the Rio Tinto share price should be right now based on that prediction.
Increased exposure to decarbonisation
I'm not saying Rio Tinto shares are worth buying just because the iron ore price has dropped, though that seems helpful for investors looking to invest.
I like the moves that Rio Tinto has been making which should help it generate good cash flow long into the future.
For example, it has been growing its exposure to lithium. It has completed its acquisition of the Rincon lithium project in Argentina. It has signed a non-binding memorandum of understanding (MoU) with Ford for a "significant" off-take agreement to support Ford's production of electric vehicles.
It has commenced underground mining at the Oyu Tolgoi copper-gold mine in Mongolia, one of the world's largest new copper-gold mines. It has also launched a bid of C$34 per share to buy the rest of Turquoise Hill Resources that it doesn't already own. The Mongolian government owns 34% of the project and Turquoise Hill Resources owns 66% of Oyu Tolgoi.
I think that having exposure to copper and lithium will help the Rio Tinto share price over the long term, which is a key reason why I think it looks like a long-term opportunity today.
