The Rio Tinto Limited (ASX: RIO) share price was out of form on Monday and tumbled lower.
The mining giant’s shares ended the day almost 3% lower at $120.05.
Nevertheless, longer term shareholders won’t be too dismayed. The Rio Tinto share price is still up over 24% since this time last year.
Why did the Rio Tinto share price tumble today?
While broad market weakness will certainly have weighed on the Rio Tinto share price, a broker note out of UBS also appears to have done so as well.
According to the note, the broker has downgraded the company’s shares from a neutral rating to a sell rating with a $104.00 price target.
Based on the current Rio Tinto share price, this implies potential downside of 13.5% over the next 12 months excluding dividends.
Why did UBS downgrade Rio Tinto?
The note reveals that UBS is expecting a sharp reduction in iron ore prices in the near future.
Its analysts believe that the steel making ingredient is approaching an inflection point due to a number of reasons. These include Chinese regulators trying to ease commodity prices, Brazilian iron ore supply increasing, and stockpiles at Chinese ports rising to above average levels.
UBS points out that Rio Tinto’s iron ore operations are the main contributor to its overall earnings. As a result, should the iron ore price fall to US$90 a tonne over the next 12 months as UBS expects, it doesn’t believe its dividends are sustainable and cuts will need to be made.
Interestingly, not everyone is bearish on Rio Tinto.
This morning analysts at Macquarie retained their outperform rating and lifted their price target on its shares to $163.00. This price target implies potential upside of almost 36% over the next 12 months. Macquarie made the move after adjusting its commodity forecasts for the coming years.
Time will tell which broker made the right call.