It has been a difficult couple of months for the Rio Tinto Limited (ASX: RIO) share price because of the falling iron ore price.
For example, since this time in August, the mining giant's shares have fallen 26% to $96.68.
This means the Rio Tinto share price has given back its year to date gains and is now down 16% in 2021.
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Can the Rio Tinto share price bounce back and hit $123 by the end of the year?
While the recent weakness in the Rio Tinto share price is disappointing for shareholders, one leading broker sees it as a buying opportunity for non-shareholders.
According to a note out of Goldman Sachs this week, its analysts have retained their buy rating but trimmed their price target on the company's shares to $123.40.
Based on the current Rio Tinto share price, this implies potential upside of 28% over the next 12 months.
In addition, Goldman expects Rio Tinto to pay an US$8.28 (A$11.37) per share fully franked dividend in FY 2022. This represents an 11.8% dividend yield at current prices, which increases the total potential return to almost 40%.
What did the broker say?
Goldman is bullish on the Rio Tinto share price for four key reasons. One of those is its attractive valuation.
It explained: "Valuation: trading at 0.8xNAV and discounting a long run iron ore price of US$59/t (vs. GSe long run of US$67/t real).
The broker also notes that Rio Tinto is in a position to generate significant free cash flow, which will support bumper dividend payments in the near term.
"Strong FCF and dividend yield: FCF/dividend yield in 2022 (14%/12% yield) & 2023 (12%/11%), and a still attractive 9% FCF yield in 2022 at a lower US$80/t scenario," the broker said.
And while Goldman Sachs isn't expecting production growth over the next six months, it believes 2022 will herald a return to growth
It explained: "Return to production growth in 2022: RIO is not a growth story over the next 6 months (we forecast -4% Cu Eq growth for RIO at the group level in 2021) it is a FCF story in our view, however, we see the company returning to growth in 2022 & 2023 with a 5% and 3% increase in Cu Eq production respectively."
Finally, the broker is a fan of the mining giant due to its exposure to aluminium.
Goldman said: "Compelling low emission aluminium exposure: In addition to copper production growth, RIO has one of the highest margin, the lowest carbon emission aluminium businesses in the world, with over 2.2Mt of Ali production powered by hydro, and we think the ELYSIS inert anode technology could be worth billions."
All in all, if everything goes to plan, this broker sees potential for the Rio Tinto share price to reach $123.00 again by the end of the year.
