Rio Tinto Ltd (ASX: RIO) shares are still down more than 11% from their 52-week high in May 2024, as the chart below shows. With the ASX mining share materially lower, it's worth asking if the company is an investment opportunity.
A simple piece of investing advice comes from Warren Buffet, who once said: "Be fearful when others are greedy and greedy when others are fearful." In other words, buy low, sell high.
It's quite easy to adopt that attitude with ASX mining shares because of how volatile and cyclical their profits and share prices can be. ASX iron ore shares can be particularly volatile right now, given the variable demand from China.
Let's look at some of the reasons why Rio Tinto shares appeal to me.
Why I like Rio Tinto shares
The lower iron ore price has opened up an opportunity to invest in the company at a lower price. According to Trading Economics, the iron ore price is currently US$101 per tonne. That's high enough for Rio Tinto to still make a solid profit but low enough that it has led to a cheaper valuation.
A year ago, the iron ore price was above US$130 per tonne.
It has dropped amid weakness in the Chinese economy, particularly the construction sector.
However, there may be positive signs ahead. Trading Economics reports that China's Ministry of Commerce announced plans to "boost consumption and stabilise foreign trade and investment this year, further supporting sentiment." Additionally, it referred to data that revealed China's annual imports of iron ore hit a record high of 1.24 billion tonnes last year. Annual steel shipments from the country also reached their highest level since 2015, totalling 110.7 million tonnes.
I also like Rio Tinto's growing exposure to copper, a key material for the coming years due to its essential role in the world's electrification in the coming decades.
The miner has exposure to several projects, including the huge Oyu Tolgoi project in Mongolia. According to Rio Tinto's website, global demand for copper is set to grow 1.5% to 2.5% per year, which is a useful tailwind. In one example of why copper demand could grow, the miner noted electric vehicles used four times more copper than a traditional vehicle.
But, I'm not jumping to buy at this price.
Why I'm cautious
As the chart below shows, the Rio Tinto share price has been significantly lower in the past few years — it has been under $100 for short periods and under $110 for a few times. I mention this to say it's possible Rio Tinto could drop further.
I think it's useful the ASX mining share is part of the huge Simandou project, which could help earnings. However, an increased supply of iron ore into the market could mean a lower iron ore price in the coming years.
Looking at the projection on Commsec, the dividend yield is not that appealing at the moment. The estimate suggests a grossed-up dividend yield of 5.2%, including franking credits.
The last thing I'll mention is that Rio Tinto is making huge investments in lithium. It's a bold move and could be a smart counter-cyclical play. However, there's no guarantee that this invested money will unlock good returns, and there's a danger that Rio Tinto is focusing on the wrong area.
If I were trying to beat the market's return, I wouldn't choose to buy today.
