As Motley Fool Investment Analyst, Claude Walker, wrote last year "iron ore stocks are not good dividend stocks."
The recent voluntary suspension of Atlas Iron Limited (ASX: AGO) shares – following an 87% drop in price during the prior 12 months – is ringing loud and clear.
Atlas Iron is a 'junior' $110 million iron ore miner with a relatively high breakeven price. Therefore, with the iron ore price plummeting from over $US110 per tonne a year ago, to just $US60 per tonne now, it's little wonder Atlas is one of the first miners on the chopping block.
However, even the major miners such as Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) and Fortescue Metals Group Limited (ASX: FMG) are at risk of significant share price falls.
Here are three reasons why I'm not buying Rio Tinto – Australia's biggest iron ore producer– at today's prices.
- As we highlighted here, iron ore accounted for 46% of Rio Tinto's revenues in 2014, up from 27% in 2008. With the commodity tipped to continue falling in years ahead, the miner's share price is heavily leveraged to any downside.
- For a long time financial commentators have been ranting about excess iron ore supply. However, eyes will now turn to demand – especially from China, which consumes two-thirds of the world's supply. China's economy is in transition and demand for steel is expected to wane.
- It's really not that diversified. If iron ore prices go the way of coal or aluminium (which, by the way, Rio is also a major producer of), it'll mean profit margins stay lower-for-longer. In addition to those commodities above, copper and uranium do not appear likely to enjoy a significant jump in market prices any time soon.
Should you buy, hold or sell Rio Tinto shares?
Rio Tinto shares may appear cheap on conventional measures or by looking backwards. However it's important to drive your investment vehicle looking forward. And at today's prices, I think Rio Tinto does not appear good value given the headwinds it faces.
