Rio Tinto Ltd (ASX: RIO) shares were out of form on Tuesday. The mining giant's shares tumbled 2.5% to $116.81.
Investors were hitting the sell button in response to a second quarter update which fell short of the market's expectations.
Has this created a buying opportunity for investors? Let's see what analysts at Goldman Sachs are saying about the miner.
What is the broker saying?
Goldman highlights that Rio Tinto's update was a touch on the mixed side with positives and negatives. It commented:
RIO reported Pilbara iron ore shipments of 80.3Mt, ahead of GSe (+2%) but in line with consensus. IOC production missed by c.15% (2.2Mt) on lower mining rates and maintenance; regional wildfires are likely to impact 3Q volumes. Pilbara 1H'24 realised price of US$105.8/t was lower than GSe at US$106.5/t. Pilbara cash cost guidance is unchanged at US$21.75-23.5/t (GSe US$23.3/t) with June H costs expected to be above the top end due to lower 1H volumes.
The good news is that the broker still believes that Rio Tinto can achieve its guidance for the full year. It adds:
For RIO to hit the midpoint of Pilbara shipments guidance of 323-338Mt (GSe 331Mt), a 2H run-rate of 345Mtpa is required, which we believe is achievable.
Are Rio Tinto shares a buy?
In response to the update, Goldman has reaffirmed its buy rating with a trimmed price target of $136.10. Based on its current share price of $116.81, this implies potential upside of 16.5% for Rio Tinto's shares over the next 12 months.
In addition, the broker is expecting dividend yields of approximately 5.5% in both FY 2024 and FY 2025, which boosts the total potential 12-month return to approximately 22%.
Goldman continues to believe that its shares are good value compared to peers. It said:
Compelling relative valuation: trading at c. ~0.8x NAV (A$144.0/sh) vs. peers (BHP ~0.9x NAV and FMG ~1.3x NAV) and c. ~5.5x NTM EBITDA at GSe base case, below the historical average of ~6-7x. 2.
It also highlights its attractive free cash flow (FCF) and dividend yield. The broker adds:
FCF/dividend yield in 2024E (c. 6%/6% yield) & 2025E (c. 7%/6% yield) driven by our bullish view on aluminium and copper in 2H24 (~30% of group EBITDA in 2024 increasing to 45-50% by 2026) and constructive view on iron ore.
And finally, Goldman likes Rio Tinto due to its production growth potential. It explains:
RIO is a FCF and production growth story in our view, with forecast Cu Eq production growth of ~4-7% in 2025 & 2026 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, and a rebound in aluminium production + the acquisition of Matalco.
