Are Rio Tinto shares a buy after the miner's results?

Here's what one leading broker is saying about the mining giant.

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Rio Tinto Ltd (ASX: RIO) shares caught the eye of investors yesterday.

Following the release of the mining giant's half-year results, its shares charged 2.5% higher to end the session at $117.48.

Where next for Rio Tinto shares?

The good news for shareholders is that Goldman Sachs believes that the company's shares can keep rising from here.

But first, let's see what it is saying about the result.

According to a note, the broker was pleased with Rio Tinto's performance. It commented:

RIO reported 1H24 underlying EBITDA/NPAT of US$12.1bn/US$5.8bn, broadly in-line with GSe and Visible Alpha Consensus Data and up slightly YoY. Pilbara & aluminium costs both beat with some modest deflation now flowing through.

However, the main reason that Goldman Sachs is bullish is Rio Tinto's positive production growth outlook. It adds:

Major projects are on track including Simandou, the Pilbara and Oyu Tolgoi, with RIO believing they are at a growth inflection point, targeting Cu Eq production of around 3% CAGR from 2024-2028 from existing operations and projects. This compares to our 3.8% estimate (based on GSe long run prices), with a third of growth driven by the ramp-up of the Oyu Tolgoi UG copper mine.

RIO has numerous high quality advanced projects that are shovel ready including Resolution copper and Jadar lithium but are awaiting government approvals, brownfields growth such as further expansion of OT, and opportunities to create significant value by turning around underperforming assets such as Bingham Canyon copper and Pacific aluminium.

Time to buy

In light of the above, Goldman has reiterated its buy rating with a slightly trimmed price target of $136.60. This implies potential upside of 16% for investors over the next 12 months.

In addition, the broker is forecasting fully franked dividend yields of 5.5% in FY 2024 and then 5.8% in FY 2025.

Goldman rates Rio Tinto as a buy due partly to its attractive valuation, attractive free cash flow (FCF) generation, and, as mentioned above, its production growth. It explains:

Compelling relative valuation: trading at c. ~0.8x NAV (A$147/sh) vs. peers (BHP ~0.9x NAV and FMG ~1.2x NAV) and c. ~5x NTM EBITDA at GSe base case, below the historical average of ~6-7x.

Attractive FCF and dividend yield + GS bullish copper and aluminium (~30% of EBITDA increasing to 45-50% by 2026E): FCF/dividend yield in 2024E (c. 6%/6% yield) & 2025E (c. 7%/6% yield) driven by our bullish view on aluminium and copper in 2H24 (~30% of group EBITDA in 2024E increasing to 45-50% by 2026E) and constructive view on iron ore.

Strong production growth in 2025E & 2026E: RIO is a FCF and production growth story in our view, with forecast Cu Eq production growth of ~4-7% in 2025 & 2026 driven mostly by the ramp-up of the Oyu Tolgoi UG copper mine & a recovery at Escondida and Bingham, higher Pilbara Fe shipments with the ramp-up of new mines, and a rebound in aluminium production.

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