Image source: Getty Images
Shares of the London mining giant Rio Tinto (LSE:RIO) hasn’t had a good year, so far, but that has also sent the yield up to 7%.
The stock has fallen more than 16% since January and is now trading at around 4,950p. However, this came after a very good period for commodity prices. The steel and mining sector has been cyclical. But as technologies like electric vehicles (EVs) and energy infrastructure develop, long-term demand for Rio Tinto’s products looks incredibly strong.
So is the recent share price weakness an unreasonable buying opportunity for long-term investors to consider?
What causes share price declines?
As a natural resource business, Rio Tinto has no pricing power. As such, its revenues and profits are highly sensitive to fluctuations in the market price of metals. Based on the group’s current production capacity, the amount of iron ore mainly drives the gains. And sadly, the price per ton has dropped from about $131 to $102 in the last 12 months.
Pairing low prices with a lack of target steel production volume does not inspire confidence in investors. So with that in mind, it’s no surprise that the stock has taken a double-digit plunge, dragging its previous price-to-earnings ratio down to 8.6. That is now less than several of its competitors, such as Glencore again Anglo American. That’s right Rio Tinto stocks are now very cheap?
A long-term vision
The demand for steel is unlikely to disappear anytime soon. It is an important ingredient of steel, used worldwide in almost all industries. However, management has been eager to try to reduce its dependence on iron ore by shifting to other high-demand materials, particularly copper and lithium.
Both of these things are important in modern electronics and technology. And the general consensus is that current global supply will not be able to keep up with expected long-term demand. In other words the prices of both items may see prices rise slightly in the coming years.
Copper is already a small part of Rio’s production portfolio. Meanwhile, the group’s first lithium mine is expected to join the show before the end of 2024, with more projects in the pipeline for exploration and development.
In other words, the company appears to be well positioned to meet long-term demand expectations. And as Western governments combine investment in energy infrastructure and digitization, Rio Tinto may soon enjoy a more favorable operating environment with a better product mix.
Time to shop?
There’s a lot to like about Rio Tinto, especially for long-term investors. However, personally, it’s not a business I’m in a rush to buy even at today’s seemingly cheap price and attractive dividend yield.
Even with the progress made in diversifying its product portfolio, it may take several years before earnings are almost entirely driven by steel prices. Beyond this single asset risk, mining laws are becoming increasingly strict in the regions where Rio Tinto operates, due to local impact.
Therefore, production costs look set to rise, suggesting that profit margins may come under pressure, and with it, dividends. That said, investors seeking exposure to the mining industry may want to think twice.
Source link
