Why it could be time to buy Rio Tinto shares

Goldman Sachs has given its verdict on this mining giant's shares. Is it a buy?

| More on:
A young man goes over his finances and investment portfolio at home.

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

Rio Tinto Ltd (ASX: RIO) shares may have rebounded from recent lows, but they remain well short of their highs.

For example, at present, the mining giant's shares are fetching $111.38, which is 20% lower than its 52-week high of $138.72.

While this is disappointing for shareholders, analysts at Goldman Sachs think it is a compelling buying opportunity for the rest of us.

Time to buy Rio Tinto shares

According to a recent note, the broker has a buy rating and $136.60 price target on the mining giant's shares.

This implies potential upside of almost 23% for Rio Tinto's shares over the next 12 months. And that doesn't include the dividends that it is forecast to pay over the period.

Goldman is forecasting fully franked dividend yields of approximately 5.8% in FY 2024 and then 6% in FY 2025. This brings the total potential 12-month return closer to 29% for investors.

Why is now the time to buy?

Goldman has picked out five reasons why it thinks Rio Tinto shares are in the buy zone for investors.

The first is its valuation. Goldman highlights that its shares trade at a discount to peers and historical averages. It said:

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.

The broker also likes Rio Tinto for its strong free cash flow generation, which is being underpinned by copper and aluminium. It adds:

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.

Another reason to be positive is its production growth potential. It highlights:

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.

Goldman also sees scope for Rio Tinto to improve its free cash flow per tonne in the Pilbara, which would be another big boost to its financial performance. It adds:

Pilbara turnaround (~50% of group NAV): the potential for FCF/t improvement in the Pilbara in 2024 & 2025 with Guida-Darri and improved mining productivity, and over the medium to long run driven by Rhodes Ridge. RIO's 2023 Pilbara visit confirmed that the Pilbara turnaround is underway and medium-term shipments guidance of 340-360Mtpa appears achievable (GSe ~360Mtpa by 2030 with Rhodes Ridge).

Finally, the broker is a big fan of its low emission aluminium exposure. It said:

Compelling high margin low emission aluminium exposure: Rio has the world's highest margin low emission aluminium business, with over 2.2Mt of Ali production powered by hydro.

All in all, it appears to believe that these factors will help drive Rio Tinto shares higher and generate big returns over the next 12 months.

Should you invest $1,000 in Allkem right now?

Before you buy Allkem shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Allkem wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

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 female miner wearing a high vis vest and hard hard smiles and holds a clipboard while inspecting a mine site with a colleague.
Materials Shares

Why are Fortescue shares charging higher today?

What is getting investors excited today? Let's find out.

Read more »

Business people discussing project on digital tablet.
Materials Shares

What does Macquarie think Liontown Resources shares are worth?

Let's see if analysts think that this lithium miner is in the buy zone or best avoided.

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Materials Shares

Lynas shares charge higher on big news

What is getting investors excited today? Let's find out.

Read more »

Lion holding and screaming into a yellow loudspeaker on a blue background, symbolising an announcement from Liontown.
Materials Shares

Liontown Resources shares roar higher on big news

This lithium miner is catching the eye with some big news. Here's what is happening.

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

What does Macquarie think BHP shares are worth?

Is now a good time to buy the miner's shares? Let's find out.

Read more »

Middle age caucasian man smiling confident drinking coffee at home.
Materials Shares

What does Macquarie think Pilbara Minerals shares are worth?

Is this lithium miner dirt cheap? Let's find out.

Read more »

Two miners standing together.
Materials Shares

Is it time to buy this beaten down lithium share?

This diversified miner’s share price has been hit on multiple fronts. What does it mean for investors?

Read more »

a mine worker holds his phone in one hand and a tablet in the other as he stands in front of heavy machinery at a mine site.
Materials Shares

Pilbara Minerals share price falls on 30% quarterly revenue slump

ASX investors are bidding down Pilbara Minerals shares on Thursday. Here’s why.

Read more »