Are Rio Tinto shares a buy on a pullback?

The Rio Tinto Ltd (ASX: RIO) share price has dipped more than 10% since May 2024. It’s common to see volatility when it comes to ASX mining shares, so investors may be wondering whether this sell-off is a buy-the-dip opportunity.

In the shorter term, commodity-focused stocks are often heavily influenced by movements with their respective commodity prices.

Rio Tinto is one of the largest players in the world, and its key commodity is iron ore. However, the iron ore price has dropped recently, so let’s consider the situation there first.

Weakness in the iron ore price

According to Trading Economics, the iron ore price is under pressure amid inventories at Chinese ports recently hitting a two-year high, signalling “weaker demand from steel mills for metal production.”

Trading Economics reported that analysts point to “widening losses among steelmakers and signs of falling hot metal output as dragging demand.”  

The iron ore price has fallen to around US$110 per tonne, down from above US$140 per tonne at the start of the year and down from US$117 per tonne in May.

However, it’s possible that the reduction of both the Rio Tinto share price and the iron ore price could be a buy-the-dip situation, particularly if the iron ore price were to rebound sooner rather than later.

Promising signs?

A couple of positives could lead to a better iron ore price, though we shouldn’t base an investment decision on a possible short-term commodity movement.

Trading Economics reported that the latest data revealed that Chinese exports beat forecasts, with 8.6% growth in June. As an exporting and steel-heavy economy, good exports could mean more demand in the medium term for Australian iron ore.

According to Trading Economics, there is also hope that China will announce more financial stimulus at an important political gathering next week to boost the Chinese economy. Slowing inflation in the US may lead to a potential rate cut this year by the US Federal Reserve.

Is the Rio Tinto share price a buy?

The ASX mining share is currently rated as neutral by the broker UBS. The price target is $127, which implies a possible rise of 6% from today.

UBS notes that the copper mine Oyu Tolgoi’s underground ramp-up is on track, while the huge iron ore project in Africa called Simandou is also progressing “to plan”.

The broker said the ASX mining share has “improved operationally” and “should trade well if iron ore, copper and aluminium prices hold/move higher.”

UBS predicts Rio Tinto can generate net profit after tax (NPAT) of US$12.1 billion in FY24 and US$12.3 billion in FY25 while paying annual dividends per share of US$4.48 in FY24 and US$4.56 in FY25.

I think Rio Tinto is a compelling miner, and its growing exposure to copper is attractive. However, the valuation does not look like it’s at bargain levels to me. If the Rio Tinto share price fell under $110, or even under $100, that could be a better time to invest. That could happen if/when the iron ore price falls below US$100 per tonne.

The post Are Rio Tinto shares a buy on a pullback? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.