The Rio Tinto Limited (ASX: RIO) share price came under pressure with the rest of the market on Thursday.
The mining giant's shares ended the day 2% lower at $92.52 despite announcing an agreement to acquire mining company Turquoise Hill.
This means that the Rio Tinto share price is now down 6.5% since the release of its half year results in late July.
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Is the Rio Tinto share price in the buy zone?
While the recent performance of Rio Tinto's shares has been disappointing, one leading broker appears to see it as a buying opportunity for investors in September.
According to a note out of Goldman Sachs this morning, its analysts have retained their buy rating and $121.50 price target on its shares.
Based on the current Rio Tinto share price, this implies potential upside of 31% for investors over the next 12 months.
And let's not forget that this mining giant is traditionally a big dividend payer. Pleasingly, Goldman expects the big dividends to continue and is forecasting an 8% yield for both FY 2022 and FY 2023.
Adding this into the equation, the total potential return on offer with its shares over the next 12 months stretches to almost 40%.
What did the broker say?
This morning's note is focused on Rio Tinto's agreement to acquire Turquoise Hill.
Overall, Goldman is pleased with the agreement, particularly given its belief that the Oyu Tolgoi operation will be a major contributor to the company's future earnings. It commented:
If approved the Transaction is expected to close shortly thereafter and will give RIO a 66% interest in Oyu Tolgoi [OT] (vs. the current 34% effective ownership) with the remaining 34% owned by Mongolia, simplifying the ownership structure, and allowing RIO to work directly with the Government of Mongolia to progress the project, while also strengthening RIO's copper portfolio.
OT is one of RIO's most important growth assets as, at its current ownership, we estimate the project will double RIO's earnings from copper to over 25%, will be long life (+40yrs), low cost (1st quartile), has +50% expansion potential, and in our view is under explored.
In light of the above, Goldman believes the company will be getting a good deal if it completes successfully. It explained:
We value OT at US$23.5bn (from 2022) on a 100% basis at our long run copper price (US$4.1/lb real $ from 2026), and RIO's current 34% effective share at US$9.1bn (A$8.1/sh; incl. fees). The ~US$3.3bn offer equates to an EV of US$10.4bn including TRQ's net debt as at 30 June of US$3.8bn, which implies a valuation of US$15.7bn for 100% of OT. The offer therefore represents a 33% discount to the valuation contained in our price target, or ~0.7xNAV.
