Own Rio Tinto shares? Here's why UBS says 'it is too early to be confident'

UBS has urged caution on Rio Tinto shares.

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Key points
  • UBS is now ‘neutral’ on Rio Tinto shares, after upgrading its rating 
  • Morgan Stanley rates the ASX mining share as a buy 
  • Rio Tinto recently completed the acquisition of the Rincon lithium project 

Owners of Rio Tinto Limited (ASX: RIO) shares may want to know what a leading broker just said about the ASX mining share.

Rio Tinto is one of the world's biggest commodity businesses. The iron ore segment usually makes the most profit, but it's also in multiple other commodities such as bauxite, aluminium, alumina and copper.

It also just completed the acquisition of the Rincon lithium project for $825 million in Argentina, after receiving approval from Australia's Foreign Investment Review Board (FIRB). The mining company says that lithium demand is expected to grow by between 25% to 35% per annum over the next decade, with a significant supply and demand deficit expected from the second half of this decade.

A man points at a paper as he holds an alarm clock, indicating the ex-dividend date is approaching.

Image source: Getty Images

Updated broker thoughts on the Rio Tinto share price

According to reporting by the Australian Financial Review, UBS recently upgraded its rating on Rio Tinto.

UBS used to rate the large ASX mining share as a sell, but it upgraded the rating to 'neutral'. The broker's price target on Rio Tinto went up to $104, up from $90.

The broker pointed to the disruption to the iron ore market amid the Russian invasion of Ukraine and economic data in China that was stronger than expected.

However, UBS is still cautious about saying the business has gone through a complete turnaround.

The AFR quoted UBS with its comments on Rio Tinto:

Management has changed materially since 2020 and potentially some progress is being made with the key issues.

However, it is too early to be confident that Rio has turned the corner and we note there will be further challenging strategic decisions over the next six to 12 months which have the potential to impact shareholder value.

Morgan Stanley's rating on the Rio Tinto share price

But UBS isn't the only broker that recently updated its thoughts.

Morgan Stanley noted that Reuters recently reported that Guinea has reached a deal with miners to resume activities on the Simandou iron ore development, after resolving infrastructure disputes.

Simandou has more than 4 billion tonnes of ore according to Guinea's government.

The news organisation reported that Mines Minister Moussa Magassouba said on state television that a framework agreement had been signed between the government and companies involved in the project, which includes Rio Tinto.

Morgan Stanley thinks it could be several years until the first ore is achieved at Simandou.

Morgan Stanley rates Rio Tinto as a buy, with a price target of $130.50.

Valuation

UBS thinks the Rio Tinto share price is valued at under 7x FY22's estimated earnings and under 9x FY23's estimated earnings.

Morgan Stanley thinks the ASX mining share will generate even stronger profit. Morgan Stanley believes that the Rio Tinto share price is valued at under 6x FY22's estimated earnings and under 9x FY23's estimated earnings.

The broker also thinks Rio Tinto has a projected FY22 grossed-up dividend yield of 18.7% and an estimated FY23 grossed-up dividend yield of 12.1%.

Motley Fool contributor Tristan Harrison has no position 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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