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%.
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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).
