Are Rio Tinto shares a buy?

The Rio Tinto Limited (ASX: RIO) share price has risen nearly 40% YTD. Is it a buy?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Like many of the ASX miners this year, the Rio Tinto Limited (ASX: RIO) share price has recently been drawing plenty of attention.

Rio shares are currently trading for $107.20 at the time of writing, after nearly breaking the 52-week high of $107.99 earlier today (Rio shares got up to the $107.94 mark just after lunch). This caps off a phenomenal year for our second largest miner, with Rio shares up almost 40% in 2019 so far (not including dividends).

So are Rio shares a buy today?

Who is Rio Tinto?

As mentioned, Rio Tinto is our second largest mining company on the ASX and the 12th largest public company in the country, with a market capitalisation of $39.79 billion. Rio Tinto has a dual listing, with our compatriots over in the motherland (aka the UK) able to buy Rio shares on the London Stock Exchange as well. The company was actually founded in Spain back in 1873, so it's a truly multinational company on all fronts.

Most investors know Rio Tinto as an iron miner, and this is mostly true. Of the US $9.825 billion that Rio posted in underlying earnings for 2018, US $6.51 billion came from iron ore, with US $1.35 billion stemming from aluminium and US $1.05 from copper and diamonds. The remaining earnings resulted from other minerals such as uranium, titanium and boron. So as you can see, iron makes up about 66% of Rio's earnings.

This places it in between the other big ASX mining companies. BHP Group Ltd (ASX: BHP), for example, gets close to 40% of earnings from iron, whereas Fortescue Metals Group Ltd (ASX: FMG) derives above 90% of its earnings from mining iron ore.

Why Rio shares have risen so high

This large exposure to the production of iron ore means that Rio shares usually rise and fall on the back of the iron ore price. Iron ore has appreciated significantly this year, partly due to supply issues resulting from the collapse of a large dam owned by Brazilian mining giant Vale in Brazil earlier this year. The price of iron ore has risen from around the US $70 per tonne level to around US $120 per tonne today. It costs Rio about US $13.30 to mine one tonne of iron ore, so this has boosted the company's profits in a major way and been largely responsible for the massive share price gains we have seen in 2019 so far.

Foolish Takeaway

Commodity companies are highly cyclical, especially iron miners, and Rio Tinto is no different – now might not be the best time to open a position. I expect the supply constraints surrounding the iron price will eventually dissipate and the price will come down from these highs, with the Rio share price close behind. If (or when) this eventuates, it might be worth the wait to get some shares at more of a discount.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Resources Shares

Three miners looking at a tablet.
Resources Shares

3 ASX mining shares to sell today: experts

These iron ore, coal, and lithium miners have attracted sell ratings from brokers.

Read more »

Miner looks into the distance as he checks a folder.
Resources Shares

Mineral Resources share price plunges as debt weighs on miner

Fundamental issues continue to plague the diversified miner.

Read more »

Three miners looking at a tablet.
Resources Shares

Buy, hold, or sell? Here's what Morgans is saying about these ASX mining stocks

Are these miners buys, holds, or sells?

Read more »

Australian notes and coins symbolising dividends.
Dividend Investing

Why did the Rio Tinto dividend just shrink to 7-year lows?

Rio Tinto just slashed its half-year dividend payout. But why?

Read more »

Iron ore price Vale dam collapse ASX shares iron ore, iron ore australia, iron ore price, commodity price,
Resources Shares

Why this expert is calling time on Fortescue shares

A leading expert delivers his verdict on Fortescue shares.

Read more »

Happy man working on his laptop.
Resources Shares

Prediction: In 12 months this scorching ASX mining stock could turn $1,000 into $1,750

Brokers are impressed with high production forecasts.

Read more »

View of a mine site.
Resources Shares

Core Lithium share price tumbles as investors await Finniss restart

Investors are bidding down Core Lithium shares today. But why?

Read more »

View of a mine site.
Resources Shares

Mineral Resources shares lift off on record results

ASX investors are piling into Mineral Resources shares following the miner’s quarterly results.

Read more »