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.
