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.
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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.
