Rio Tinto Ltd (ASX: RIO) shares were under pressure again on Wednesday.
Investors were hitting the sell button after mining giant's third quarter update fell short of expectations.
This latest decline means that the miner's shares are now down 6.5% since the end of last month.
Is this a buying opportunity? Let's see what analysts at Goldman Sachs are saying now they have had time to assess the company's quarterly release.
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What is the broker saying about Rio Tinto's update?
Goldman acknowledges that Rio Tinto's third quarter performance was a touch disappointing. It said:
RIO reported a slightly softer than expected Sep Q production with iron ore, aluminium and copper production 2-3% below GSe, but bauxite & alumina production above GSe.
Pilbara iron ore shipments of 84.5Mt were in line with consensus but -2% vs GSe. […] Mined copper production of 168kt was 3% below GSe due to plant maintenance at Oyu Tolgoi (OT) in Mongolia and lower grades at the Kennecott mine in the US, with Escondida performing well despite the minor disruptions from the Union 1 wage negotiations
In light of the above, the broker has trimmed its earnings forecasts slightly, which has led to a similar cut in its valuation. Nevertheless, Goldman sees enough value in Rio Tinto's shares to hold firm with its buy rating.
According to the note, its analysts have retained their buy rating with a slightly reduced price target of $136.20. Based on its current share price of $120.78, this implies potential upside of almost 13% for investors over the next 12 months.
In addition, the broker is forecasting fully franked dividend yields of 4.2% in FY 2024 and 4.6% in FY 2025.
Why is it bullish on Rio Tinto's shares?
There are a number of reasons why Goldman believes that investors should be buying the miner's shares today. These include its attractive valuation and positive free cash flow outlook. It said:
Relative valuation: trading at c. ~0.8x NAV (A$150.7/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. 2.
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. 4%/4% yield) & 2025E (c. 6%/5% 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.
