three yellow excavators near front end loader

Rio Tinto (LSE:RIO) shares were trading around 4,600p a month ago. As we write, they are trading at 5,160p, a gain of over 12% on this period. Given that there are several reasons for optimism around the company at the moment, here’s why the share price has jumped and why we think that further gains are on the horizon.

Iron Ore prices rebound

As we wrote about before, Rio Tinto shares are correlated to the performance of the underlying commodities that the business mines. Iron ore is one of the main ones. If the price of iron ore falls, then Rio Tinto ultimately generates lower revenue when it comes to selling the commodity on the market (at the going market price!).

One of the reasons that we bought shares in Rio Tinto last year was because we thought the slump in iron ore prices had been overdone. The falling price was as a result of concerns around a China slowdown. Since China is one of the main consumers of iron ore (as a component of steel production), it was a logical move lower. From our point of view, the move looked overdone, dragging the Rio Tinto share price down with it. 

Since then, we’ve seen iron ore prices rally. It’s rallied over 20% in the past month, to trade at $120 / T at the moment. Last summer, it was trading comfortably above $200 / T. Therefore, one of the reasons why we think Rio Tinto shares can continue to move higher still is the fact that iron ore has further upside potential.

Fears over a China slowdown have been around for years, and it hasn’t materialized yet. With a global economic recovery from the pandemic likely in 2022 and 2023, China will likely be at the forefront of this move.

High income prospects

The other reason why we think the share price has rallied recently is due to the attractive dividend yield. It has a 10% yield at present, which has reduced slightly due to the rising share price.

Over the past month, it’s become clear that inflation in the UK is running hot. the latest reading we have is 5.1%. Even though this forced the Bank of England to raise interest rates last month, the base rate sits at a meagre 0.25%. Therefore, we think that investors are using the attractive dividend to offset this inflation.

With a yield of 10%, even with inflation at 5% it’s still a positive real return. Clearly, this return isn’t guaranteed. There’s also the risk that the Rio Tinto share price falls, meaning that I might take on a capital loss when I sell. Even with this being the case, we think that shares will continue to rally as more investors pour in to take advantage of this dividend income.

We think that Rio Tinto shares could continue to rally.

AlphaPicks does own shares in Rio Tinto. To buy crypto and shares, register here with our preferred partner, EToro.

Leave a Reply