The Rio Tinto Limited (ASX: RIO) share price has continued rising today, up another 3% on higher iron ore prices. How much further can they go?
About Rio Tinto
Rio Tinto’s origins date back more than 145 years, but today it is one of world’s largest aluminium and iron ore producers, with much of its sales revenue coming from its operations in Western Australia. It also owns, fully or partly, mining projects for copper, diamonds, uranium and other minerals.
All-Time High
Rio Tinto shares have been unstoppable for the past six months, up 45%. The share price hit $100 in April this year for a short time before pulling back slightly. Today they have pushed as high as $107.90.
Most of the run can be put down to high iron ore prices, which have also sent the likes of Fortescue Metals Group Ltd (ASX: FMG) and BHP Limited (ASX: BHP) higher in recent months.
The Key Risks Facing Rio In 2019
While it’s all looking rosy for the Rio Tinto shareholders, there are a couple of key risks that the company faces. The first is that the iron ore price drops. As a price-taker, Rio Tinto is sensitive to price movements in iron ore and so a fall in iron prices would likely see Rio Tinto shares tumble as well.
The second key risk, closely related to the first, is a slowing growth rate in China. This is one of the more likely scenarios that could push iron ore prices down. China represents a significant portion of the world’s iron ore demand, driven by its steel consumption in the construction industry. If the trade war put pressure on economic growth in China, it could very well lead to less construction and reduced demand for steel and iron ore.
These are the two key reasons why I wouldn’t be looking to invest in Rio Tinto at current prices. Although there is potential for the share price to move higher, I think there are better options for growth shares. Rio Tinto may be a better purchase for dividends, as it currently offers a 4.17% fully franked dividend yield.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
