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What top brokers are saying about Rio Tinto’s latest update

Brendon Lau
miners in front of mining truck

Investors are overcoming their disappointment with the Rio Tinto Limited (ASX: RIO) share price bouncing back following the release of its quarterly production update yesterday.

The Rio Tinto share price jumped 0.7% to $103.96 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained a more modest 0.4%.

Our largest iron ore miner closed in the red on Tuesday after reporting a decline in iron ore production in the June quarter and problems at its massive Oyu Tolgoi copper project in Mongolia.

The results meant that Rio Tinto ended the first half in an inglorious fashion but before you decide if you should forgive and forget, you might want to hear what leading brokers have to say about the snafu.

Why Rio Tinto is still a “buy”

Citigroup is sticking to its “buy” recommendation and $114 per share price target as the production hiccups in the Pilbara wasn’t unexpected although the same can’t be said about Oyu Tolgoi, which overshadowed a better performance from its copper assets.

“RIO is still considering changes to mine plan at Oyu Tolgoi given geotechnics and will likely result in some infrastructure (ore handling systems etc but not crusher) being redesigned/relocated,” said the broker.

“Final decision/estimates due in 2H CY20 but preliminary information indicates a delay in reaching sustainable u/g production of 16-30mths (between May 2022 and June 2023). Capex guidance now US$6.5-$7.2bn, an increase of US$1.2-$1.9bn from previous US$5.3bn.”

Meanwhile, Macquarie Group Ltd (ASX: MQG) believes there’s downside risks to Rio Tinto’s production forecasts for the 2019 calendar year, particularly given that the miner plans to undertake rail maintenance work in October.

However, the broker has also reiterated its “outperform” recommendation on the stock as it thinks Rio Tinto will redeem itself with a solid profit result.

“Despite volume weakness in 2QCY19 and downside risk to Pilbara iron ore guidance, RIO’s earnings upgrade momentum remains significant with buoyant iron-ore prices and declining alumina prices providing upside risk to our base case,” said Macquarie, which has a $117 per share price target on the miner.

“A spot price scenario generates 15% and ~90% higher earnings than our base case for CY19 and CY20, respectively.”

Not everyone thinks Rio Tinto share price is good value

However, Morgan Stanley thinks the good news is already reflected in the current share price and the latest quarterly has reinforced its “equal-weight” stand on the stock.

“The shares are relatively fairly valued, in our view,at 5.1x EV/EBITDA and 9.0% FCFyield on base case scenario 2019e and 4.5x and 10.3% on spot scenario (Iron Ore at USD118/t),” said the broker.

“Financial risks remain very low with US$1.3bn net debt by end of the year (2019e) and no net debt at year end 2020e if spot prices prevail.”

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and Rio Tinto Ltd. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019