Overnight, iron ore prices climbed slightly higher to around $US62 per tonne.
Shares of Rio Tinto Limited (ASX: RIO), Australia's largest iron ore miner, opened today up 0.47%, or around $55.95.
Are Rio Tinto shares dirt cheap?
Before you consider buying Rio Tinto shares, let's first look at what it does.
I find the following chart puts it into perspective…
As can be seen above Rio Tinto's Iron Ore division is the real money-maker, accounting for an overwhelming proportion of last year's underlying profits.
Therefore, any judgement call on the miner's valuation is, in large part, mostly a function of the performance in its iron ore division.
Unfortunately, following steep falls in the steel-making ingredients market price the short to medium-term outlook for iron ore is anything but rosy…
As the above graph shows, iron ore prices have been incredibly favourable for miners over the past decade. However, now, in the wake of China's transition to a consumption-based economy, demand for iron ore is expected to wane.
Coupled with expectations of massive increases in production from the major global miners (including Rio) over the next two to three years; iron ore prices are likely to remain depressed for some time yet.
Will it survive?
Despite plunging prices, Rio Tinto will survive. Indeed, given its exceptionally low breakeven prices compared to its peers it's still making a profit at a healthy margin.
There's also tentative signs of a recovery in its beleaguered Aluminium division, which has been an absolute disaster for the company since 2008.
Is it cheap?
Over its full 2015 financial year, Rio Tinto is forecast to post a profit roughly 40% lower than a year earlier according to analysts polled by Morningstar. That places its shares on a price-earnings ratio of 15.5x, which doesn't appear cheap.
However, if the worst is yet to come in iron ore markets then investors choosing to buy today could be digging themselves into deep trouble.
A much better dividend stock idea than Rio Tinto…
