'Compelling relative valuation': Why Rio Tinto shares could be a buy

Goldman Sachs returned from the Pilbara in high spirits.

| More on:
Image from either construction, mining or the oil industry of a friendly worker.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

If you're looking for options in the mining sector, then Rio Tinto Ltd (ASX: RIO) shares could be just the ticket.

That's the view of analysts at Goldman Sachs, which have come back from a tour of the miner's Pilbara operations in high spirits.

According to the note, the broker has responded to the visit by retaining its conviction buy rating with a slightly trimmed price target of $126.20.

This implies a potential upside of approximately 9% for investors from current levels. In addition, the broker is forecasting a 5.1% dividend yield from its shares in 2024, lifting the total potential return beyond 14%.

What did the broker say about Rio Tinto and its shares?

Goldman was pleased with the investor tour of the Pilbara last week. It highlights that the visit confirmed that the Pilbara turnaround is underway and that medium-term shipments guidance of 340-360Mtpa is achievable. The broker commented:

Our key takeaways were: (1) RIO's Pilbara turnaround continues with an ongoing improvement in mining rates expected to lift shipments slightly in 2024 to 323-338Mt (GSe 337Mt), (2) Medium term shipments guidance of 340-360Mtpa appears achievable with annual depletion of ~5% (90Mt of depletion expected from 2024-2028) to be offset by ~130Mtpa of new mine capacity. Medium term capex guidance (US$4bn p.a.) and opex (US$20/t) is broadly in-line with GSe, (3) The visit to Rhodes Ridge highlighted the scale and value opportunity of the 7bt high grade deposit.

The broker also sees the Rhode Ridge deposit as the key to closing the free cash flow gap on BHP Group Ltd (ASX: BHP). It adds:

We continue to think the >80Mtpa development of the high grade Rhodes Ridge deposit has the potential to be significant for RIO's Pilbara business as it could lift system capacity, utilise spare rail and port infrastructure and help close the FCF/t gap with BHP over the medium to long run

Overall, in light of the above and at ~0.85x NAV, Goldman believes Rio Tinto shares have a "compelling relative valuation" compared to BHP and Fortescue Metals Group Ltd (ASX: FMG).

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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Materials Shares

A young man punches the air in delight as he reacts to great news on his mobile phone.
Materials Shares

Why this $10 billion ASX lithium stock is surging 8% today

This lithium miner is making its shareholders smile on Thursday. But why?

Read more »

Five happy miners standing next to each other representing ASX coal mining shares which some brokers say could pay big dividends this year
Materials Shares

ASX lithium shares: Best 5 of a weak bunch in 2024

Only one All Ords lithium stock really impressed investors last year with a near 90% share price gain.

Read more »

Three miners looking at a tablet.
Materials Shares

Why did the BHP share price crash 21% in 2024?

This mining giant had a disappointing year. Will things be better in 2025?

Read more »

a man holds his arms out and shrugs his shoulders as if indicating he doesn't know the answer to a question he's been asked.
Materials Shares

Why did the Pilbara Minerals share price crash 45% in 2024?

Why were investors selling off this lithium giant this year? Let's dig deeper into things.

Read more »

Image of young successful engineer, with blueprints, notepad and digital tablet, observing the project implementation on construction site and in mine.
Materials Shares

How much could $5,000 invested in BHP shares be worth in a year?

Here's what one leading broker believes could happen with this miner's shares next year.

Read more »

A woman jumps for joy with a rocket drawn on the wall behind her.
Materials Shares

Bell Potter says this ASX lithium stock could rocket 90%+ in 2025

Let's see why the broker is bullish on this lithium developer.

Read more »

A female employee in a hard hat and overalls with high visibility stripes sits at the wheel of a large mining vehicle with mining equipment in the background.
Materials Shares

Forget Fortescue shares and buy this ASX iron ore stock

Bell Potter thinks this iron ore miner could deliver big returns over the next 12 months.

Read more »

Miner looking at a tablet.
Materials Shares

Are ASX lithium shares prime real estate for value hunters?

Can these stocks recharge returns for investors?

Read more »