The Rio Tinto share price 'remains undervalued' and could rise 20%+

Goldman Sachs thinks this mining giant is being undervalued by the market.

If you are looking for bargain investments, then the Rio Tinto Ltd (ASX: RIO) share price should be on your radar.

That's the view of analysts at Goldman Sachs, which believe that the mining giant's shares are going cheap right now.

A man wearing a shirt, tie and hard hat sits in an office and marks dates in his diary.

Image source: Getty Images

What is the broker saying about the Rio Tinto share price?

According to the note, while the broker is bullish on both BHP Group Ltd (ASX: BHP) and Rio Tinto, its preference at this point in time is the latter.

This is due to Rio Tinto's positive production and free cash flow outlook. The broker explains:

We have completed a deep dive into RIO & BHP's project pipelines, which we estimate at around US$50-60bn each (excluding maintenance capex), including an upside 'all growth' case scenario that incorporates future growth options not in our base case. Despite both mining companies spending around ~US$10-11bn p.a., we expect RIO to widen the production (Cu Eq) and FCF gap over BHP over the next 5yrs; alongside valuation, this is a key reason we prefer RIO.AX over BHP.AX (both Buy-rated).

Goldman highlights that Rio Tinto's copper production is expected to grow in the low single digits in the coming years, whereas BHP's copper production is expected to be flat. It adds:

RIO is growing Cu Eq production at 3-4% p.a. from 2025-30 compared to BHP flat. Cumulatively, we expect RIO's Cu Eq production to grow by ~20% to the end of the decade vs BHP with almost no growth.

Given the positive outlook for the copper price, this is great news for Rio Tinto and its shareholders. Especially given that it should be supportive of capital returns. It adds:

Looking at capital management, on our assumptions, RIO can maintain a 60% dividend payout and trades on a dividend yield of ~6-8% over the medium term, above our forecast for BHP at ~4% (at a 50% payout of NPAT p.a) over the same period.

Time to buy

In light of the above, this morning Goldman Sachs has reaffirmed its buy rating on Rio Tinto's shares with a price target of $143.50.

Based on the current Rio Tinto share price of $117.23, this implies potential upside of approximately 22.5% for investors over the next 12 months.

In addition, a 5.5% fully franked dividend yield is expected in FY 2025, which lifts the total potential 12-month return to approximately 28%.

Goldman concludes:

RIO.AX remains undervalued vs BHP.AX (although the gap has closed over the past year), trading at ~0.7x NAV (A$168.4/sh), vs. BHP ~0.8x NAV, and ~5.3x NTM EBITDA at GSe base case, below the historical average of ~6-7x.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended BHP Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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