Should you buy Rio Tinto shares during this sell-off?

Is it time to dig in and buy this ASX mining share?

| More on:
Man sits smiling at a computer showing graphs

Image source: Getty Images

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

The Rio Tinto Ltd (ASX: RIO) share price has fallen more than 21% since May 2024, as we can see in the chart below. I get excited when industry giants are sold off because it can mean they're a buying opportunity.

Created with Highcharts 11.4.3Rio Tinto Group PriceZoom1M3M6MYTD1Y5Y10YALL11 Sep 20239 Sep 2024Zoom ▾Nov '23Jan '24Mar '24May '24Jul '24Sep '24Oct '23Oct '23Jan '24Jan '24Apr '24Apr '24Jul '24Jul '24www.fool.com.au

It's normal for there to be volatility in the commodity space due to the supply and demand dynamic between the various buyers and sellers. For ASX iron ore shares like Rio Tinto, China is the key buyer.

I often like to say that the iron ore price is cyclical, so we can identify contrarian opportunities in the space at the right time. And with the recent ongoing weakness, I think Rio Tinto shares could be an intriguing proposition for two reasons.

Iron ore weakness

The iron ore price has plunged 10% to close to $90 over the past week, representing the worst weekly drop since February.

According to reporting by Trading Economics, the decline was due to soft economic data and weak demand prospects for steel. The latest data showed that China's manufacturing activity remained "contractionary" in August, while services sector growth slowed.

Another headwind for iron ore miners is that Chinese steel mills are experiencing reducing profits, despite the fall of the iron ore price. New home prices in China also rose at a slower pace in August.

Rising iron ore inventories at Chinese ports continue, which is another weakness in the country's supply-demand relationship.

None of these conditions are positive, so they largely explain why the iron ore price and Rio Tinto share price have fallen so far.

I believe it's during times like this, where there is no positive catalyst in sight for the foreseeable future, that we are presented with the best prices for commodity businesses. If the Chinese economy rebounds, the iron ore price could start recovering.

We don't know when or if the iron ore price will rise though. But, with the Rio Tinto share price as low as it is, I think the dividend yield could help compensate us during this period.

According to the Commsec estimate, the miner could pay a grossed-up dividend yield of 8.8% in FY25, based on the current Rio Tinto share price.

In the longer term, I believe the huge Simandou project in Africa could have low mining costs and large profit margins.

Cheaper exposure to copper

With Rio Tinto's valuation dropping, we can now gain the miner's exposure to copper for a cheaper price.

I think copper has a much clearer growth outlook – it's important for global electrification and decarbonisation.

Rio Tinto has various projects, including Oyu Tolgoi in Mongolia, one of the world's largest known copper and gold deposits, and the Kennecott mine in the United States.

A copper shortage is predicted in the coming years as it becomes increasingly difficult to find high-quality copper deposits.

As more copper production comes online, I think Rio Tinto's copper earnings can grow and play a more important role in the company's earnings. It's this growing exposure to copper that makes me believe Rio Tinto shares are a contrarian buy for the long term at this beaten-down price.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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

Miner looking at a tablet.
Resources Shares

What happened with the BHP share price in May?

Did you buy BHP shares in May? Here’s how much the ASX 200 miner returned.

Read more »

Miner looking at a tablet.
Resources Shares

Should I buy Fortescue shares today?

A leading investing expert offers his verdict on the outlook for Fortescue shares.

Read more »

A female miner wearing a high vis vest and hard hard smiles and holds a clipboard while inspecting a mine site with a colleague.
Resources Shares

Is this a good time to buy BHP shares?

Should investors jump on the ASX mining shares right now?

Read more »

Miner looking at a tablet.
Broker Notes

Why Macquarie expects this ASX 200 copper stock to surge 36% in a year

Macquarie forecasts some hefty gains ahead for the ASX 200 copper miner. But why?

Read more »

A young African mine worker is standing with a smile in front of a large haul dump truck wearing his personal protective wear.
Resources Shares

Following its FY25 result, Macquarie tips more than 40% upside for this ASX All Ords mining stock

Let’s dig into why this is such an exciting stock.

Read more »

Miner looking at a tablet.
Resources Shares

Macquarie forecasts 30% upside for this ASX All Ords mining stock

If a broker is right, investors have a lot to gain with this stock.

Read more »

Miner looking at a tablet.
Resources Shares

Should I buy Pilbara Minerals or Mineral Resources shares? Here's Macquarie's take

Mineral Resources and Pilbara Minerals shares are both down more than 60% in a year, but Macquarie forecasts a big…

Read more »

Miner looking at a tablet.
Resources Shares

Does Macquarie rate Fortescue shares a buy, hold or sell?

Down 42% in a year, does Macquarie think Fortescue shares are now a good buy?

Read more »