Rio Tinto (LSE:RIO) shares extended losses on Wednesday after the mining stock released its half-year results. The stock fell around 3% in early morning trading, and is now down around 8% over the past 30 days.
So let’s have a closer look at the earnings update and see whether this fall represents a buying opportunity for my portfolio.
Profits fall
The headline news from the H1 report was that profit fell 27%. The global mining stock posted an underlying profit of $8.63bn for the six months to 30 June. This compares poorly with the record $12.17bn registered a year earlier, but slightly ahead of the company-compiled estimate of $8.37bn.
The FTSE 100 giant slashed its interim dividend from $5.61 to $2.67 per share. The total dividend for the first half still equates to $4.3bn — Rio’s second-highest interim payout ever.
The company also said it was cutting its capital investment forecast for 2022 by $500m to $7.5bn. Chief executive Jakob Stausholm said that the market environment had become “more challenging” at the end of the period, noting a tight labour market and falling iron ore prices.
Outlook
I’m fairly positive on long-run demand for commodities and that’s made me fairly bullish on mining stocks. I contend that we’re entering a period of scarcity characterised by increased competition for resources and higher average prices.
There are trends that will support this, such as an infrastructure boom in developing countries that push up demand for products like steel and therefore iron ore.
Also, demand for lithium — a material used in electric vehicle battery production — is forecast to rise by 25-35% a year over the next 10 years as clean energy-driven cars become increasingly popular.
But, in the near term, I think there could be some more pain for mining stocks, perhaps with the exception of those focused on gold — gold tends to do well when economies go into reverse.
We’ve got sky-high oil prices, rampant inflation, negative economic forecasts in the UK and Germany, as well as elsewhere in the world. These factors, along with lockdowns and lower economic growth in China, will likely pull commodity prices down further later in the year.
There’s some other short-term issues such as China proposing (again) to centralise the procurement of iron ore. This would likely increase China’s bargaining power and put downward pressure on the commodity. It’s worth noting that Rio Tinto is currently highly dependent on iron ore – it contributed 59% of revenues in 2021.
Would I buy Rio Tinto shares?
I’d buy Rio Tinto shares at the current price and hold them for the long run. However, I accept there may be better entry points later in the year as demand for commodities may fall on lower economic growth globally. It’s also worth noting that while the dividend yield remains attractive, it’s certainly not as attractive as it used to be — 12%.