When it comes to investing in the mining sector, there are two names that come to mind immediately.
These are BHP Group Ltd (ASX: BHP) and Rio Tinto Ltd (ASX: RIO). But are their shares in the buy zone right now?
Let's take a look and see what analysts at Goldman Sachs are saying about the two mining behemoths ahead of the release of their quarterly updates later this month.
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Should I buy BHP and Rio Tinto shares?
The good news is that Goldman Sachs thinks that both miners are top options for investors right now.
And while the broker has a preference for Rio Tinto, it still feels that BHP shares offer a compelling risk/reward.
According to the note from this morning, the broker has retained its buy rating on the Big Australian's shares with a slightly trimmed price target of $49.20. This implies almost 10% upside for investors from current levels.
In addition, the broker is forecasting fully franked dividend yields of 4.8% in FY 2024 and 4.3% in FY 2025. This stretches the total potential 12-month return beyond 14% if I were to buy BHP shares where they trade today.
Goldman likes BHP for four reasons. These include its attractive valuation and strong production growth opportunities. It explains:
Buy rated on: (1) Attractive valuation, but at a premium to RIO; (2) GS bullish copper and met coal; (3) Optionality with the +US$20bn copper pipeline and strong production growth over 24/25; (4) Robust FCF, but still below RIO. We continue to believe that BHP's major opportunity is growing copper production in Chile at Escondida and Spence, and growing copper production and capturing synergies in South Australia between Olympic Dam and the previous OZL assets.
The top pick
Goldman's preference remains with Rio Tinto shares. This morning, it has retained its buy rating on the miner's shares with an improved price target of $140.20. This suggests potential upside of 14% for investors from current levels.
And with Goldman forecasting fully franked dividend yields of 5.4% in FY 2024 and 5.7% in FY 2025, I could get a total return of over 19% over the next 12 months if its analysts are on the money with their recommendation.
There are five reasons why the broker rates Rio Tinto shares as a buy. It explains:
Buy rated on: (1) compelling relative valuation vs. peers, (2) attractive FCF and Div yield, (3) strong production growth in 2024-2025E of ~5-6% CuEq driven by the ramp-up of the Oyu Tolgoi UG copper mine & a recovery at Escondida and Bingham, higher Pilbara Fe shipments with the ramp-up of new mines, (4) potential for FCF/t improvement in the Pilbara, and (5) high margin low emission aluminium business.
