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The S&P/ASX 200 Index (ASX: XJO) is having a pretty poor showing on the ASX boards so far this Thursday. At the time of writing, the ASX 200 is down by 0.48% to 7,413 points. One ASX 200 share that’s faring far worse though is the miner Rio Tinto Limited (ASX: RIO). Rio shares are currently down by more than double the index today, having lost a nasty 1.34% at $92.88 a share.
The collapse in the Rio Tinto share price over the past few months has been startling to watch. It was only back in early August that Rio was pushing on its new all-time high of $137.33. Its valuation is now down by roughly a third from that level today. It’s also down almost 30% over the past 3 months.
So what’s gone so wrong for Rio? Are investors so quick to forget that this company just paid out the largest dividend in its rather long history? Rio shares still have a whopping trailing dividend yield of 9.72%, after all…
Falling iron ore batters Rio Tinto share price
Well, we don’t have to look much further than the iron ore price to understand Rio’s woes over the past 3 months. Although Rio is still a relatively diversified miner compared to other players like Fortescue Metals Group Limited (ASX: FMG), it still received more than 75% of its underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) over 2020 from iron ore alone.
So Rio’s profitability is very much tied to the fortunes of iron ore. And lo and behold, the price of iron ore has fallen off a cliff over the past 3 months. According to BusinessInsider, iron ore was fetching a record high close to US$220 a tonne back in late July. But as it stands today, iron ore is asking a far more muted US$122 a tonne. In other words, it’s close to half of what it was just 3 months ago.
Cheaper iron ore means less cash in the bank for Rio, and by extension, lower dividends for shareholders. Yes, Rio has been paying out record dividends over the past year, but investors know that the company will struggle to keep those up with this decline in iron ore pricing, at least at the record levels we have recently seen.
So this is probably the primary driver behind Rio’s steep falls over the past 3 months. When you’re a miner, you usually have to ride or die on the price you can command for your chosen commodity. This can cut both ways, as it indeed has over 2021 so far.
At the current Rio Tinto share price, this ASX 200 miner has a market capitalisation of $34.94 billion.