Here’s why Macquarie sees 39% upside in the Rio Tinto (ASX:RIO) share price

Brokers have varying views on the resources giant’s shares, but one broker in particular is very positive.

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Shares in resources giant Rio Tinto Limited (ASX: RIO) are struggling to find range today. At the time of writing, the Rio Tinto share price is $94.71, after rallying as high as $95.71 and slipping as low as $94.38 in early trade.

Zooming out, Rio shares are swimming in a sea of red across all time frames, even if prices have just bounced from 3-month lows.

Despite this downtrend, analysts are split on the future direction of Rio Tinto’s share price. Let’s take a closer look.

What’s up with Rio Tinto shares lately?

Rio shares have been drifting lower these past few months. The trend began after the mining giant released its 3rd quarter results.

As advised by Rio at the time, it had another difficult quarter after struggles dealing with the pandemic. Ore shipments were barely afloat, growing just 2% for the 12 months. Much of the headwinds came from weakening iron ore prices across 2021.

As Chinese demand for steel’s main ingredient slowed, the price of iron ore rapidly fell from a high of US$229.50/tonne in May to now trade at US$92.50/tonne – a staggering 60% decline.

The results meant Rio also lowered its target output across major commodities such as iron ore, titanium dioxide, bauxite, aluminium and mined copper.

Investors responded poorly to Rio’s quarterly update and sent its share price backtracking where it hit 52-week lows two weeks ago.

Can the Rio Tinto share price climb to $133?

The team at Macquarie seem to think so. Analysts at the firm recently retained their valuation of $133/share and retained an outperform rating on Rio’s share price.

One factor Macquarie highlights in reasoning is Rio’s recent efforts to bump up its ESG framework. This includes a collaboration with US-based nonprofit, Resolve, to re-purpose mining waste from Rio’s legacy mine sites.

The agreement spawns a company called Regeneration, and Rio has already made an equity investment of $2 million. Macquarie also notes Rio’s $87 million investment to build 16 new posts using AP60 technology in Canada as a positive step towards its ESG credentials.

Aside from this, the broker likes Rio’s free cash flow generation, that was spurred on by record iron ore prices achieved in early 2021.

Meanwhile, Citi believes it’s time to revisit the valuations of iron ore shares, especially with Chinese monetary policy and political risks softening. The broker says “with the recent share price corrections, we see value across the Australian iron-ore sector”.

JP Morgan thinks there is “still plenty of valuation support and free cash flow yield in the space” as well, and forecasts a 10% free cash flow yield in fiscal 2022 for Rio. The broker reckons that other commodities, such as coal and copper, will also jump in to offset iron ore weakness.

Or could Rio Tinto fall to $87?

Whilst the teams at these leading brokers are heavily bullish on its direction, others aren’t as optimistic. The team at Jefferies disagree on the valuation front and are cautious on the entire metals/mining space.

It reckons that ASX iron ore shares still aren’t cheap – even with the large pullbacks of late. As such, it retains a hold rating and a $100 share price target.

Investment bank Morgan Stanley also cautioned investors on Rio’s situation in a note released to clients today. It reckons that Rio will take a hit if the Mongolian government gets its way from talks on the Oyu Tolgoi project.

Basically, the Mongolian government wants Rio to cover additional costs and cancel the debt on its 34% share of the Oyu Tolgoi project.

Oyu Tolgoi, in the South Gobi region of Mongolia, is one of the largest known copper and gold deposits in the world, according to Rio. When the underground is complete, it will be the world’s fourth largest copper mine. Rio owns the remaining 66% of Oyu Tolgoi through a company vehicle, Turquoise Hill Resources.

The broker estimates the accumulative burden for Rio to be $700 million if Mongolia’s debt is waived and another $700 million to cover the government’s share of costs if it goes ahead.

Morgan Stanley has a $101 price target on the Rio Tinto share price which it updated yesterday after staying equal weight on its rating.

The lowest price target on the list of analysts covering Rio Tinto is $87 from RBC Capital Markets, whereas Evans and Partners reckon that shares can hit $146. As such, the spread between all valuations is around 68% or $59 per share.

In the past 12 months, the Rio Tinto share price has fallen over 8% after sliding another 17% this year to date.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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