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

sdf

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

A man wearing a hard hat and high visibility vest looks out over a vast plain where heavy mining equipment can be seen in the background.
Resources Shares

Is the Fortescue share price a buy for passive income?

Let’s dig into the potential of this mining giant.

Read more »

Female miner standing next to a haul truck in a large mining operation.
Resources Shares

Major miners fall as iron ore prices continue to sink

Waning Chinese demand and oversupply concerns push iron ore prices lower.   

Read more »

A mining worker clenches his fists celebrating success at sunset in the mine.
Resources Shares

Would I buy Pilbara Minerals shares?

Are investors missing an opportunity with this lithium stock?

Read more »

Three miners looking at a tablet.
Resources Shares

Here's the earnings forecast out to 2029 for BHP shares

Let’s dig into the predictions.

Read more »

A smiling miner wearing a high vis vest and yellow hardhat does the thumbs up in front of an open pit copper mine.
Broker Notes

Why Macquarie expects this ASX All Ords copper stock to soar 48% in a year

Macquarie forecasts another big year of gains ahead for this ASX All Ords copper stock. But why?

Read more »

Female miner standing smiling in a mine.
Broker Notes

Why Macquarie predicts Pilbara Minerals shares could surge 71%

Macquarie forecasts a big rebound ahead for Pilbara Minerals shares. Let’s find out why.

Read more »

Two mining workers in orange high vis vests walk and talk at a mining site.
Resources Shares

ASX All Ords mining stock sinks on US silver acquisitions

Investors are bidding down the ASX All Ords miner on US acquisition news. But why?

Read more »

Image from either construction, mining or the oil industry of a friendly worker.
Resources Shares

How these 2 tailwinds could boost the BHP share price into 2026

A leading expert forecasts that BHP shares are set to recover. But why?

Read more »