Is Rio Tinto Limited the best resources stock for risk-averse investors?

Despite being one of the largest mining stocks in the world, Rio Tinto Limited (ASX:RIO) probably isn't a company which risk-averse investors should add to their portfolio.

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Rio Tinto Limited (ASX: RIO) is a great company.

I say that because I think the business now has a competent management team, led by CEO Sam Walsh, and will still be operating 10 or 20 years into the future.

It has been drilling, digging, processing and transporting commodities since around 1873 and has a number of current projects which will last for many decades.

It has extremely low cost operations and is a world leader in logistics and automation, giving it competitive advantages over its peers.

However, it does have weaknesses and like any miner, is exposed to fluctuations in commodity prices. Especially iron ore.

The steelmaking ingredient accounts for around 90% of earnings and has fallen hard in 2014. Down approximately 40% in just 10 months. Thanks to its scale and low break-even costs, the miner's share price is down only 14%, whilst some of its smaller rivals have already gone out of business.

But there could be more pain to come, as demand from China is being tipped to slow, whilst at the same time supply from major iron ore miners is increasing.

Therefore in the short term, shareholders and potential investors appear to be faced with a potentially volatile share price which may be impacted by substantial swings in profitability.

Buy, hold, or sell?

Rio is a first-class mining outfit which I think will still be around many years from now. However, it is facing a number of headwinds in the short term, including a falling iron ore price. Although its diversified commodity mix could provide some relief, given the proportion of earnings derived from iron ore, risk-averse investors should probably only keep both it and its peer, BHP Billiton Limited (ASX: BHP), on a watchlist.

Motley Fool Contributor Owen Raszkiewicz is long Dec 2017 $47 Warrants in Rio Tinto Limited. 

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