Rio Tinto Limited (ASX: RIO) shares are a leading opportunity, according to top broker Goldman Sachs.
The large ASX mining share has seen quite a lot of volatility over the past year, and the broker thinks that the business could rise from here.
A large part of Rio Tinto's net profit comes from iron ore, so changes in the iron ore price can have a big impact on the rest of the underlying short-term value of the business and its profitability.
Rio Tinto has received backing from Goldman Sachs, suggesting it could have another good year.
Iron ore prices to go higher?
Goldman Sachs' commodity team recently increased its iron ore price forecast to US$120 per tonne for 2023, up from US$100 per tonne, with a three-month target of US$150 per tonne, compared to the current price of around US$125 per tonne.
The broker has an expectation that the seaborne market should swing into a "significant deficit" of 43 million tonnes in the first half of 2023 because of "lower seasonal supply from Australia and Brazil and an expected recovery in Chinese steel volumes."
Goldman Sachs pointed out that recently there is an ongoing recovery in Chinese property sales and an uptick in Chinese blast furnace utilisation, steel production and rebar prices. It noted that, generally, property lead starts driving higher steel demand.
Another factor that could help the iron ore price is that all of the above is happening while Chinese steel mills have their lowest inventories since 2016, with mills starting to restock in recent weeks.
Goldman Sachs finished its positive commentary for the iron ore market with this:
An improvement in Chinese steel prices and mill margins should also be positive for high grade iron ore.
Will this boost Rio Tinto shares?
The broker noted that Rio Tinto's Pilbara iron ore business produced 324 mt in 2022, and Goldman Sachs thinks it will produce 335 mt in 2023 because of the ramp-up of the new 45mt Gudai-Darri mine by mid-year and the strong start with shipments.
Developing Rhodes Ridge "has the potential to be significant" for its Pilbara businesses as it could lift the mine system capacity by more than 10% to more than 360 mt per annum, utilise spare rail and port infrastructure, and help close the more than US$10 free cash flow per tonne gap with BHP Group Ltd (ASX: BHP) by US$6 to US$8 by the end of the decade.
Goldman Sachs said that Rio Tinto shares have a compelling valuation compared to peers. It could generate "strong" free cash flow and dividends, with the broker having a bullish view on iron, aluminium and copper prices. The broker is also expecting strong production growth of iron and copper. The high-margin, low-emission aluminium business could also be a positive.
$15 million fine
It was announced this morning that the ASX mining share has resolved an investigation by the US Securities and Exchange Commission (SEC) into some contract payments made to a former consultant in 2021, relating to the Simandou project in the Republic of Guinea.
Without admitting to or denying the SEC's findings, Rio Tinto has agreed to pay a $15 million civil penalty for violations of the books and records and internal control provisions of the law.
The miner said it has taken "significant actions" to enhance its compliance programme. Dominic Barton, Chairman of Rio Tinto said:
We are glad to have resolved this matter related to events that occurred over a decade ago on appropriate and reasonable terms.
When Rio became aware of the issue, an internal investigation was immediately launched, and we
proactively notified the appropriate authorities.Since becoming aware, Rio Tinto has taken significant actions to enhance our compliance
programme based on best practices. Under current leadership we are taking action to build a culture
guided by our values of care, courage and curiosity; an environment where every team member
feels comfortable to speak up if something is not right. We remain committed to conducting business
to the highest standards of integrity, and ensuring that our projects benefit communities, host
governments, shareholders, and customers.
Rio Tinto share price target
Goldman Sachs lifted its price target by 7% to $140.40. That implies a possible rise of more than 10% over the next 12 months.
