The Rio Tinto Limited (ASX: RIO) share price has almost doubled since February, when it hit 52-week lows of $36.53. Shares in the mining giant are now trading above $60.
Much of those gains have come on the back of a rising iron ore price. Spot iron ore is up 73% since the start of this year to trade at US$74.90 a tonne overnight.
Rio generated 83% of underlying earnings from iron ore in the six months to end of June 2016, despite the commodity generating just 39% of revenues. Aluminium generated 18% of underlying earnings from 28% of the revenues.
And despite copper & diamonds generating US$2.45 billion in revenues, underlying earnings was negative US$67 million. That should improve once Rio starts production at the Oyu Tolgoi underground copper mine in Mongolia in 2020.
The group's energy and minerals division, which includes coal, Canadian iron ore, iron and titanium, minerals, salt and uranium posted revenues of US$2.96 billion but underlying earnings of just US$82 million.
That includes Rio's 68.4% interest in uranium miner Energy Resources of Australia Ltd (ASX: ERA) – although that asset is probably worth less than zero given the likelihood of the Ranger mine closing in 2021 and then spending five years rehabilitating the mine site.
While it's worth noting Rio's other assets, the main driver of earnings and hence the share price is the iron ore price. And that it seems is difficult to forecast with any degree of reliability. I had thought that downward pressures would see the commodity price stay low in 2016, but as I mentioned earlier it has soared.
My next forecast (let's face it, it's a guess) is that the iron ore price pulls back a bit, but continues to trade between US$50 and US$70 a tonne over the next few years. That would be good news for Rio as it continues to pump out the tonnes and optimise its Pilbara iron ore operations to make them more efficient – thereby lowering production costs.
Rio may not be all that happy that fellow iron ore miner Fortescue Metals Group Limited (ASX: FMG) thinks it may have surpassed Rio to become the lowest cost iron ore miner in the world. At its AGM earlier this month, Fortescue said its C1 cash costs were $15.43 a tonne, and is aiming to bring that down even further.
Foolish takeaway
According to Commsec, Rio is trading on a trailing P/E of 19x and paying a fully franked dividend yield of 3.7%. That appears to be a high price to pay, but Rio is highly regarded by the market as a quality miner. Fortescue trades on a P/E of 12.7x, but may be higher risk given its debt balance.
