Rio Tinto Ltd (ASX: RIO) shares have been having a tough time recently.
Since the start of the year, the mining giant's shares have lost 12% of their value.
Can they rebound? Let's find out what one broker is saying.
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Where next for Rio Tinto shares?
The good news for investors is that Goldman Sachs believes the company's shares can rebound from current levels.
A recent note reveals that its analysts have put a buy rating and $136.20 price target on its shares.
Based on the current Rio Tinto share price of $120.12, this implies potential upside of 13% for investors over the next 12 months.
In addition, the broker is forecasting fully franked dividends per share of US$3.44 (A$5.23) in FY 2025 and then US$3.81 (A$5.79) in FY 2026. This represents dividend yields of 4.3% and 4.8%, respectively.
Combined, this means that Goldman is expecting a total potential 12-month return of over 17% for investors between now and this time next year.
Why is the broker positive?
Goldman has named five key reasons why it thinks Rio Tinto shares are a buy. The first is its valuation. It explains:
We continue to rate RIO a Buy based on: 1. 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.
Another reason to be positive is its attractive free cash flow (FCF) and dividend yield, which is being underpinned by its exposure to copper and aluminium. It said:
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.
A third reason is Rio Tinto's positive production growth outlook. The broker adds:
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, higher Pilbara Fe shipments with the ramp-up of new mines, and a rebound in aluminium production.
A turnaround in the Pilbara is a fourth reason to be positive. It explains:
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).
And finally, Goldman highlights Rio Tinto's high margin low emission aluminium exposure as a reason to buy its shares. It concludes:
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.
