The Rio Tinto Limited (ASX: RIO) share price could be on the rise on Monday.
This follows the release of a bullish broker note out of Goldman Sachs this morning in relation to the mining giant.
What did Goldman say about the Rio Tinto share price?
According to the note, the broker sees a lot of value in the Rio Tinto share price at the current level.
The note reveals that its analysts have upgraded the mining giant's shares to a buy rating with a $144.40 price target. Based on the latest Rio Tinto share price, this implies potential upside of 10.5% excluding dividends.
But if you include dividends, this potential return stretches materially. Goldman estimates that Rio Tinto's shares will provide fully franked yields of 14.1% in FY 2021, 13.9% in FY 2022, and then 11.2% in FY 2023.
Why is the broker bullish?
Goldman notes that Rio Tinto had a disappointing second quarter and fell short of its expectations for iron ore shipments. And while it suspects that it could yet underperform its guidance in FY 2021 due to operational challenges, this has been offset by the broker's iron ore forecasts.
It explained: "Our commodities team now expects the iron ore market to return to surplus in 2023 only and have upgraded 2H21 Fe to US$195/t (US$117/t previously), and 2022 to US$160/t (US$95/t previously), and highlight ongoing steel mill preference for mid-high grade over low grade."
Goldman believes this will lead to strong free cash flow generation and underpin generous dividend payments.
The broker commented: "Although we are calling for a c. US$60/t or 30% drop (from spot) in iron ore prices into 2022, we forecast record FCF/dividends in 2021 (18%/14% yield) & 2022 (16%/14%). RIO is not a growth story (we forecast -4% Cu Eq growth for RIO at the group level in 2021) it is a FCF story in our view."
It also feels the Rio Tinto share price is undervalued compared to historical multiples at peak earnings.
Goldman explained: "On an EV/EBITDA basis, 1-2yr multiples for RIO look strong at 3-3.5x, below the 4-5x level in 2011 when earnings last peaked, yet RIO's balance sheet and FCF look much stronger now."
All in all, this could make it worth considering if you're not averse to investing in the resources sector.
