Overnight the iron ore price continued to plunge, falling to just $US44.59 per tonne.
You don't need me to tell you that falling prices are bad news for iron ore miners like Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP).
However, it's terrible news for Fortescue Metals Group Limited (ASX: FMG), Atlas Iron Limited (ASX: AGO) and the host of other pure play Australian iron ore miners.
For Rio Tinto, which along with Brazil's Vale has the lowest breakeven price in the world, the latest price falls will not mean absolute annihilation of its share price, but it will hurt.
In June last year, Rio Tinto boss Sam Walsh, said his company was, "the lowest cost producer in the world with costs of $20 per tonne." At the time, iron ore was fetching $92 per tonne.
While Rio Tinto's breakeven price is estimated to be in the mid-$US30 range, at $US44 per tonne it doesn't leave the miner much breathing space.
Of course, tens – if not hundreds – of Rio Tinto's rivals will go out of business before it does. However, just as Atlas Iron recently showed, smaller, higher-cost miners will do whatever it takes to survive – including operating at a loss!
So, yes, as the chart above shows, Rio Tinto's profits from iron ore have fallen in recent years, but if the market prices continue their current trajectory, profits will fall much further.
According to Morningstar's analyst consensus forecasts, Rio Tinto's profits per share will fall by more than 40% over the current financial year. That doesn't bode well for share price outperformance.
Is Rio Tinto a sell?
Personally, I think Rio Tinto is a sell. Despite falling 13% for the year, I think more profit downgrades are on the way over the next two years. Despite increasing global production, China is obviously transitioning its economy away from steel-intensive investment and this could mean that lower iron ore prices will be here to stay for longer than many expect.
Buyer beware.
