Rio Tinto Ltd (ASX: RIO) shares underperformed the market on Thursday.
Following the release of its quarterly update, the mining giant's shares edged slightly higher to $119.61.
Whereas the ASX 200 index ended the day 1.4% higher at 8,327 points.
Should you be taking advantage of this underperformance to load up on shares? Let's see what analysts are saying.
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Are Rio Tinto shares a buy?
According to a note out of Goldman Sachs, its analysts were pleased with the miner's performance in the fourth quarter. They commented:
RIO delivered ~3% production growth (Cu Eq terms) in 2024 based on GS long run prices, with the Dec Q delivering a solid end to the year for copper and aluminium in particular. Realised pricing for 2H24 was broadly in line with GSe for iron ore but copper & aluminium were better than GSe. There is no change to 2025 production guidance that was provided with the recent Capital Markets Day (CMD) in December.
In light of this, the broker has reaffirmed its buy rating on Rio Tinto's shares with a slightly trimmed price target of $146.20. The latter reflects the lowering of its exploration expense slightly and the lifting of its bauxite price assumptions, which have offset a slight lift in aluminium cost assumptions.
Based on the current share price, this price target implies potential upside of 22% for investors over the next 12 months.
In addition, it is forecasting a fully franked 5.5% dividend yield in 2025, which boosts the total potential return beyond 27%.
Why should you buy?
Goldman continues to believe that Rio Tinto shares are attractively priced, especially given its free cash flow yield and strong production growth outlook. It explains:
We continue to rate RIO a Buy based on: Relative valuation: trading at c. ~0.7x NAV (A$163.2/sh) vs. peers (BHP ~0.8x NAV and FMG ~1.1x NAV) and c. ~5x NTM EBITDA at GSe base case, below the historical average of ~6-7x.
FCF/dividend yield in 2025E (c. 5%/5% yield) & 2026E (c. 7%/6% yield) driven by our bullish view on aluminium and copper (~45-50% of group EBITDA by 2026E).
RIO is a FCF and production growth story in our view, with forecast Cu Eq production growth of ~3-6% 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.
