To say the stock market has been choppy lately would be an understatement. But when fear is everywhere, opportunities arise for long-term investors. So, with that in mind, I’m considering whether Rio Tinto (LSE: RIO) shares hold any appeal for me – or whether there’s a better option.
A green revolution supercycle
Rio Tinto is the world’s second largest miner. Many of the commodities it mines – such as iron ore, copper, and lithium, a crucial component in EV batteries – are absolutely essential for the transition to a low-carbon economy.
This is because the reality of the green revolution is that we’re going to have to mine more of the Earth’s raw materials than ever to build out the infrastructure for a zero-carbon economy. Wind turbines, for example, are predominantly made of steel, which is made from iron ore. Three tonnes of copper are needed for a single 1-megawatt wind turbine.
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Copper is also the primary conductor in the world’s electrical infrastructure, so contributes directly to the electrification of transport. Electric vehicles (EVs) have a copper intensity three-to-four times higher than traditional vehicles.
So, going green should drive demand for Rio Tinto’s raw materials for decades to come.
Risk of a global recession
On a daily basis, the Rio Tinto share price is often influenced by the changing market price of commodities and forecasts for the world economy. A global recession would certainly reduce demand for the company’s commodities, resulting in fewer construction projects and reduced steel mill activity.
The price of iron ore has been going down over the last few months as demand in Asia cools off. China accounts for more than half the world’s steel production, so a slowdown in the Chinese economy isn’t great news for Rio Tinto.
Drop in profits
The dividend yield is due to fall next year after the company announced a reduction in its payout. This is because soaring inflation has hit profits this year. In its half-year trading update, the firm reported that free cash flow dropped by 30% year-on-year to $7.14bn, while sales revenue decreased to $29.7bn from $33bn.
However, Rio Tinto still had a $291m net cash position. Even after the cut, the prospective yield would still be higher than the FTSE 100‘s average of 4%. Still, that cut to the dividend shows how risky it can be when yields get too high.
A better alternative?
I think a better alternative for me lies in the BlackRock World Mining Trust (LSE: BRWM). Buying shares of this trust means I’m instantly invested in dozens of global mining companies. The managers run the portfolio on my behalf (for a small fee), giving me exposure to basically every mineral and material on the planet.
Rio Tinto is also its fifth largest holding, so I’d still stand to benefit if the company does well. The cherry on the cake is the dividend, which yields around 7%.
Of course, mining companies operate in the same global economy as Rio. The problems that led to its dividend cut could also impact the companies in the trust. So this isn’t an investment without risk.
However, the uncertainties in the global economy lead me to favour the trust over Rio Tinto today. I like its diversification and I’m looking to add it to my portfolio.
