Rio Tinto Ltd (ASX: RIO) shares have been having a tough time recently.
Since the start of the year, the mining giant's shares have lost 12% of their value.
Can they rebound? Let's find out what one broker is saying.
Where next for Rio Tinto shares?
The good news for investors is that Goldman Sachs believes the company's shares can rebound from current levels.
A recent note reveals that its analysts have put a buy rating and $136.20 price target on its shares.
Based on the current Rio Tinto share price of $120.12, this implies potential upside of 13% for investors over the next 12 months.
In addition, the broker is forecasting fully franked dividends per share of US$3.44 (A$5.23) in FY 2025 and then US$3.81 (A$5.79) in FY 2026. This represents dividend yields of 4.3% and 4.8%, respectively.
Combined, this means that Goldman is expecting a total potential 12-month return of over 17% for investors between now and this time next year.
Why is the broker positive?
Goldman has named five key reasons why it thinks Rio Tinto shares are a buy. The first is its valuation. It explains:
We continue to rate RIO a Buy based on: 1. Relative valuation: trading at c. ~0.8x NAV (A$150.7/sh) vs. peers (BHP ~0.9x NAV and FMG ~1.2x NAV) and c. ~5x NTM EBITDA at GSe base case, below the historical average of ~6-7x.
Another reason to be positive is its attractive free cash flow (FCF) and dividend yield, which is being underpinned by its exposure to copper and aluminium. It said:
Attractive FCF and dividend yield + GS bullish copper and aluminium (~30% of EBITDA increasing to 45-50% by 2026E): FCF/dividend yield in 2024E (c. 4%/4% yield) & 2025E (c. 6%/5% yield) driven by our bullish view on aluminium and copper in 2H24 (~30% of group EBITDA in 2024E increasing to 45-50% by 2026E) and constructive view on iron ore.
A third reason is Rio Tinto's positive production growth outlook. The broker adds:
Strong production growth in 2025E & 2026E: RIO is a FCF and production growth story in our view, with forecast Cu Eq production growth of ~4-7% in 2025 & 2026 driven mostly by the ramp-up of the Oyu Tolgoi UG copper mine & a recovery at Escondida, higher Pilbara Fe shipments with the ramp-up of new mines, and a rebound in aluminium production.
A turnaround in the Pilbara is a fourth reason to be positive. It explains:
Pilbara turnaround (~50% of group NAV): the potential for FCF/t improvement in the Pilbara in 2024 & 2025 with Guida-Darri and improved mining productivity, and over the medium to long run driven by Rhodes Ridge. RIO's 2023 Pilbara visit confirmed that the Pilbara turnaround is underway and medium-term shipments guidance of 340-360Mtpa appears achievable (GSe ~360Mtpa by 2030 with Rhodes Ridge).
And finally, Goldman highlights Rio Tinto's high margin low emission aluminium exposure as a reason to buy its shares. It concludes:
Compelling high margin low emission aluminium exposure: Rio has the world's highest margin low emission aluminium business, with over 2.2Mt of Ali production powered by hydro.
