After mining giant Rio Tinto released its quarterly update, the stock lagged behind the market on Thursday, January 17. Despite a slight increase in share price to $119.61, the ASX 200 index rose by 1.4% to 8327 points. In this context, should investors take the opportunity to buy Rio Tinto stock?
According to a report from Goldman Sachs, analysts are pleased with Rio Tinto’s performance in the fourth quarter. They noted that the company is anticipating a production increase of about 3% in 2024, with particularly robust performance in copper and aluminum during December. While the realized price of iron ore was in line with forecasts, copper and aluminum prices exceeded expectations.
Consequently, Goldman Sachs reiterated a ‘buy’ rating on Rio Tinto’s stock and slightly lowered the target price to $146.20. Based on the current share price, this target suggests a potential upside of 22% over the next 12 months. Additionally, the company forecasts a full dividend yield of 5.5% for 2025, which would bring the total potential return above 27%.
Goldman Sachs considers Rio Tinto’s stock to be attractively priced, especially when factoring in free cash flow yield and strong production growth prospects. They explained that Rio Tinto’s relative valuation is advantageous, with free cash flow and dividend yields projected for 2025 and 2026 reflecting optimism for aluminum and copper (by 2026, these metals are expected to account for about 45-50% of Rio Tinto’s EBITDA).
In Goldman Sachs’ view, Rio Tinto represents a story of free cash flow and production growth, with expectations for production to grow by 3-6% in 2025 and 2026.
Furthermore, sources have revealed that Rio Tinto (RIO) and Glencore (GLNCY) have been discussing a potential business merger, which could lead to the largest deal in the industry’s history. Initial stages of negotiations have taken place recently. Rio Tinto is the second-largest mining company globally with a market value of approximately $103 billion, while Glencore has a market cap of $55 billion. A merger between these two companies could create an industry giant that surpasses the long-standing leader, BHP, which has a market capitalization of around $126 billion.
