Rio Tinto Ltd (ASX: RIO) shares were in fine form in 2023.
During the 12 months, the mining giant's shares rose a sizeable 17%.
This compares to a gain of approximately 7.8% by the ASX 200 index over the same period.
And let's not forget the dividends the miner paid out during the year. If we add them into the equation, the total return stretches to approximately 22%.
Why did Rio Tinto shares smash the market in 2023?
There was one thing in particular that was getting investors excited last year – the iron ore price.
While Rio Tinto has operations across several commodities, iron ore is far and away the biggest contributor to its earnings.
For example, during the first half of FY 2024, Rio Tinto reported underlying earnings of US$6.4 billion. From this, its iron ore operations contributed US$5.8 billion or 90.6% of its earnings.
As a result, big swings in the price of the steel-making ingredient can have big impacts on its earnings.
And thankfully for Rio Tinto's shares and shareholders, there was a big swing upward for iron ore prices in 2023 due to strong demand for metal in China.
At present, the benchmark iron price is fetching approximately US$138 a tonne. This compares extremely favourably to its Pilbara iron ore unit cash costs guidance of US$21 to US$22.5 per tonne in FY 2024.
That implies a margin of greater than US$110 per tonne, which bodes well for its free cash flow and dividend payments.
Speaking of which, the team at Goldman Sachs is forecasting an increase in the Rio Tinto dividend to US$4.45 per share in FY 2024. This equates to approximately A$6.63 per share in local currency and would mean another attractive 5% fully franked dividend yield.
What's next?
The good news is that Goldman Sachs doesn't believe the gains are over. Though, they may not be as strong as last year.
The broker has a buy rating and $137.70 price target on Rio Tinto's shares, which implies a potential return of 5% before dividends.
