Rio Tinto’s (LON:RIO) share price has returned to the level it was at in late 2005 and early 2006, in the days when the mining boom was still young.
Not counting a short blip when the worst storms of the global financial crisis were raging, the current price of 2,357p is now bouncing around at a 10 year low.
What does this mean?
We all know the boom is over, but could it be that a 10 year low in one of the world’s most established and diversified companies represents a buying opportunity?
After all, how much lower can the shares go?
Well, as the disclaimers in all the financial services adverts say, past performance is no guide to the future.
But it is instructive to note that at the time when Rio’s shares were previously at this level, punters and pundits alike were very pleased with their performance.
In fact, in the five years to the end of 2005, the shares had more than doubled.
And twenty years ago, the shares were trading at a mere 665p.
Could they get that low again?
No one thinks it’s likely.
On a range of broker research and target prices compiled by Hargreaves Landsdown, the lowest target set for Rio is 1,900p from the mighty Goldman Sachs, which rates the company a definite “sell”, while the highest is from Deutsche Bank, a definite buyer with a target of 3,800p.
In the middle range, there are more brokers setting targets that are lower than the current price, but they’re not lower by much.
Typical of current thinking is concise commentary from Hunter Hillcoat, the experienced mining analyst at Investec.
On the one hand, says Hillcoat, sales have increased considerably over the previous decade.
On the other hand depreciation, now running at more than three times past levels, following a string of boom-time acquisitions, has cut earnings considerably.
So, says Hillcoat, with these two metrics weighing on either side of the balance it’s useful to take account of free cash flow.
It is worth noting that this is at roughly the same level it was at ten years ago, and the implication, though not stated in quite such bold terms by Hillcoat, is that the market in this particular instance is behaving rationally.
“On this measure,” he says, “Rio Tinto’s share price appears to be justified.”
But markets - at least in mining - though they can be seized by occasional bouts of rationality, rarely sustain it for long.
In its regular morning note on September 17, Fairfax urged clients to go and visit the Ai-Wei Wei art exhibition currently on show at the Royal Academy.
There are good moral and aesthetic reasons behind Fairfax’s suggestion, but there’s an economic one too, and it involves Rio Tinto.
One of Ai-Wei Wei’s most famous pieces relates to the widespread use in China of shoddy building materials, in particular steel.
The work uses 200 tonnes of rebar steel to commemorate 5,355 children that it’s estimated were killed when the Sichuan earthquake struck in 2008.
No one in China is really allowed to talk about that, which is why Ai-Wei Wei went to jail. But even so, there is nonetheless a widely held expectation that the Chinese economy will in due course turn to upgrading a lot of work that was done on the fly as it raced towards growth at any cost in the 1980s and 1990s.
Certainly, Rio Tinto is building that thought into its long term forecasts for iron ore. And if it’s right, it won’t need to go on a spending spree to meet demand – the company is already one of the world’s biggest suppliers.
So sales and earnings will expand once more without watering down margins with heavy depreciation costs.
Even so, Rio will have to sail through some choppy waters to get there.
“The key risk,” says Investec’s Hillcoat, “is the iron ore price. The spot price is currently US$59 per tonne versus our average forecast of US$52 in the second half of 2015 and for 2016.”
With that in mind, is there any point in buying Rio now rather than later?
Hargreaves Landsdown’s list of 12 institutions covering Rio includes six buyers, one seller, and five that say either, hold, neutral or overweight.
But that all assumes rational markets.
If investors suddenly get the bit between their teeth about unquantifiable potential Chinese steel demand then it’s always possible the shares could take off again in due course.
That’s unlikely to happen outside the context of a wider recovery in the mining sector. But if it does come, it’s always possible Rio could push through the 5,000p high it hit back in May 2008.
Whether it goes lower first though, is perhaps a more pressing question.