The Rio Tinto Limited (ASX: RIO) share price continues to be volatile. There is a bull case and bear case for what happens next.
Rio Tinto is one of the world’s largest producers of iron ore. It also has a smaller presence in other commodities such as bauxite, alumina, aluminium, copper and diamonds. Competitors include BHP Group Ltd (ASX: BHP) and Fortescue Metals Group Limited
(ASX: FMG).
The bull case for the Rio Tinto share price
Rio Tinto shares have been on a rollercoaster over the past year. In early August it was at $133, by November it had dropped to under $87. On 3 March 2022, it was back to $127. But it has fallen 11% since then. In 2022, Rio is up 14%.
As a global resources business, the miner is affected by changes in commodity prices as well as global investor sentiment.
Inflation isn’t typically a good thing for ASX shares, particularly if interest rates have to increase strongly to compensate. But in an inflationary environment, resources businesses can benefit from higher prices paid for the commodity.
China continues to buy large amounts of iron ore, which should help Rio Tinto to continue to generate large amounts of profit and cash flow, leading to probable big dividends as well. The FY21 dividend was huge with a total dividend of US$1o.40 per share after a 88% rise in free cash flow.
I also like that Rio Tinto is future-proofing the business by targeting lithium projects. I expect that batteries are going to be increasingly important for many years, so the Rincon project acquisition seems like a smart move.
The bear case
Resource businesses are usually cyclical. That means that the commodity price moves in cycles.
There’s that phrase ‘buy low, sell high’. Investors don’t have to sell when things are going well for cyclical businesses, but I’m not sure now makes the most sense to buy either.
With the iron ore price above US$150 per tonne, I think it’s probably more likely that we’ll see a materially lower iron price sometime
this year than US$150 being the lowest price for the rest of the year. Investors only need one opportunity to buy, so being patient would probably be wise.
Whilst Rio Tinto is diversifying, it’s iron ore that is still the main profit generator. Being dependent on China buying all of the iron ore could also be problematic in the future, particularly if it significantly reduces its demand from Australia.
Final thoughts on the Rio Tinto share price
The iron ore price and other commodities could well go higher. However, I don’t think it’s a clear opportunity at today’s price. I believe there are other ASX dividend shares that could be better opportunities.
