Down 20%, are Rio Tinto shares a no-brainer buy?

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Rio Tinto (LSE:RIO) shares have recovered after falling on earnings day last week. The stock fell around 3% in early morning trading after the H1 results, but subsequently gained towards the end of the week.

I’m pretty bullish on long-term demand for commodities, but I appreciate there might be a slowdown this year. Rio Tinto is already down 20% over the past 12 months, but I feel it may fall further.

So let’s take a closer look at its outlook and whether it’s right for my portfolio.

Results

Rio Tinto is no longer the dividend big-hitter that it used to be after it slashed its interim dividend from $5.61 to $2.67 per share last week, yet the yield remains above the FTSE 100 average.

The headline data from Rio Tinto’s H1 earnings last week wasn’t overly positive. In fact, earnings fell 27% year-on-year. Underlying profit came in at $8.63bn for the six months to 30 June, down from the $12.17bn registered a year earlier.

However, earnings were slightly ahead of company-compiled estimates.

A major reason for the falling profitability was the lower iron ore price. Rio Tinto is currently highly dependent on iron ore – it contributed 59% of revenues in 2021. 

Interestingly though, CEO Jakob Stausholm purchased 10,000 shares on Thursday, a day after the relatively disappointing results.

Prospects

Rio Tinto said it would reduce its capital investment forecast for 2022 by $500m to $7.5bn. The firm noted the difficulties of the current environment, particularly around those iron ore prices.

Beyond supply and demand issues, there has been downward pressure on iron ore, partially because of rumours that China is pushing to centralise the procurement of iron.

This isn’t the first time China has been poised to do this, but it’s certainly being seen as a real issue right now and one that could impact Rio Tinto more than others due to its weighting towards the ferrous metal.

The price of iron ore hit record highs of more than $210/tonne in June 2021, but fell below $100/tonne in July.

Rio Tinto also highlighted a tight labour market and the impact of inflation on its operations.

Yet in the long run, I’m pretty bullish on mining companies. I’ve said this before, but I believe we’re entering an era of scarcity characterised by higher resource prices as companies enter frontier markets in search of highly-sought-after commodities.

There are a number of trends supporting this. We’re seeing an infrastructure boom in developing economies such as Indonesia. Infrastructure generally requires steel, which is produced using iron ore. So, Rio Tinto’s weighting toward it may be beneficial here.

But we’re also seeing the EV market enhance demand for rare earth metals, an area in which the company is active. For example, lithium demand is anticipated to rise 25%-35% a year over the next 10 years as EV production increases.

Would I buy Rio Tinto shares?

Rio Tinto is a cyclical stock as demand for the products it sells waxes and wanes according to economic conditions. But with negative economic forecasts around the world, I think there might be further challenges for it this year.

So, while I’m bullish on the long-term demand for commodities, I wouldn’t buy the shares right now. I see there being better entry points later in the year.

The post Down 20%, are Rio Tinto shares a no-brainer buy? appeared first on The Motley Fool UK.

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James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.