Rio Tinto shares fall 6% as iron ore outlook grows gloomy

Australian iron ore miners have been on a tear in the last 12-months – as the price of Iron Ore – a vital component in steelmaking, has risen from around $70 per tonne to $120 per tonne.

However, as news emerged yesterday that Brazilian mining behemoth Vale has been given approval to partially resume production at one of its key mines; Rio Tinto Limited, BHP and Fortescue Metals Group all suffered heavy share price declines in response.

Why Vale is important

Earlier this year, Brazil’s National Mining Agency (ANM) suspended production at a number of Vale’s mines following concerns related to dam stability.

Vale’s Fabrica mine, Brucutu mine, and Vargem Grande Complex were all impacted by the ANM’s decision.

Yet with the approval for Vale to reopen its Vargem Grande Complex, the company now expects to contribute an additional 5 million tones to annual iron ore production.

Vale subsequently reiterated its 2019 iron ore production targets of between 307 to 322 million tonnes.

Iron ore miners fell – and have continued to fall – in response to the news.

Mind you, it’s not just Vale firing up production again that has seen Australian iron ore miners lower.

Analysts also drive concern

Analysts, looking towards a lower iron ore price and over-supply issues, have likely contributed to the sour sentiment around Australian iron ore miners over the last two days.

For example, a recent research note from Liberum, pointed out that:

‘Steel inventories at traders have been unseasonally restocking, iron ore port inventory declines have stalled (actually built last week), spot steel mill profitability in China has now fallen to break-even levels and supply from scrap steel and domestic iron ore appear to have accelerated.’

To add to this weaker outlook, a forecast from UBS predicts that the price of iron ore could fall to $100 per tonne in the final quarter of 2019 and potentially as low as $80 per tonne.

Rio Tinto’s share price in focus

The Rio Tinto Limited share price was the heaviest hit off the back of this news, having fallen more than 6% since Wednesday.

Just like Vale, Rio Tinto (ASX: RIO) has experienced its own set of challenges in recent times.

In June, operational difficulties saw the company revise its 2019 Pilbara shipments from between 333 to 343 million tonnes, to between 320 to 330 million tonnes.

Indeed, when the company updated investors in July, Pilbara iron ore production had dropped a sizable 8% year-over-year, primarily as a result of weather disruptions.

Moreover, early this month, the Royal Bank of Canada, when analysing BHP, reiterated their underperform rating of Rio Tinto on the basis of valuation.

The bank currently has a price target of just A$84.00 on the iron ore giant – some 12% lower than the company’s current share price.

Other iron ore miners, such as BHP Group Limited (ASX) (ASX: BHP) and Fortescue Metals Group Ltd (ASX: FMG) have also suffered losses off the back of recent news flow – both falling 3.5% and 6.4%, respectively.

All said, Rio Tinto’s share price has still rallied 32% since January.