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Rio Tinto share price on watch following broker downgrade

The Rio Tinto Limited (ASX: RIO) share price is pushing higher on Wednesday despite being downgraded by Goldman Sachs.

At the time of writing the mining giant’s shares are up 0.8% to $97.04.

Why did Goldman Sachs downgrade Rio Tinto?

According to a note out of the investment bank, its analysts have downgraded Rio Tinto’s shares to a neutral rating with a $95.10 price target.

Goldman made the move largely on valuation grounds and due to its belief that the iron ore price will soften in the second half.

It feels Rio Tinto’s shares are fully valued on a discounted cash flow basis, trading at 1.05x net asset value (NAV).

In respect to iron ore prices, Goldman commented: “[We] expect iron ore to soften in 2H and we are cautious on aluminium: we forecast a c. 15% fall in the iron ore price in 2H to US$80-85/t on increasing seaborne supply, mainly from Brazil.”

Weakness in the iron ore price can have a major impact on the company’s overall performance given how much the steel making ingredient contributes to its earnings.

Potential nasty capex surprises.

Goldman has also voiced its concerns over a potential catch up in capital expenditures which could cause a negative surprise in 2021.

It commented: “Group capex guidance for 2020 was revised down 20% to US$5-6bn (down from previous guidance of US$7bn) with the 1Q20 production report due to minor COVID-19 related labour delays across projects and the benefits of the weak AUD and CAD.”

“We think the majority of the reduction in spend will be pushed into 2021. We model US$6.8bn for 2021 vs. RIO’s prior guidance of US$6.5bn, we therefore we see a US$1.2bn increase in capex in 2021. However, we see upside risk to our capex estimate based on the recent strength in the AUD and CAD and the impacts from project delays,” Goldman added.

Which miner should you buy?

In the same note, Goldman Sachs retained its buy rating and lifted its price target on BHP Group Ltd (ASX: BHP) shares to $38.20.

The broker prefers BHP over Rio Tinto for a number of reasons.

It explained: “Of the majors, we prefer BHP over RIO on valuation (BHP looks more attractive at 0.95x NAV, vs. RIO on 1.05x), we prefer the commodity mix (iron ore + copper + met coal + oil, vs. RIO’s iron ore + aluminium + copper) and more attractive margins (c.51% group EBITDA margins, vs. RIO at c.47%).”

“We also expect BHP’s Pilbara business will surpass RIO’s over the next 2 years on both capital intensity and margins, we expect BHP to continue its stronger operating performance, and BHP has more growth options (mostly in met coal and oil) to create value for shareholders over the long run,” it concluded.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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