Why this top broker says the Rio Tinto (ASX:RIO) share price is a buy despite weak iron-ore outlook

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The Rio Tinto Limited (ASX: RIO) share price is edging higher in afternoon trade and is currently exchanging hands at $102.80 apiece.

Despite the gain today, Rio Tinto shares have been on a slippery slope these past few months, having come off highs of $134.40 on 4 August.

That’s well behind the S&P/ASX 200 index (ASX: XJO) which is down around 4% in this time.

Why is the Rio Tinto share price drifting lower?

The Rio Tinto share price has been sliding lower lately in unison with the price of iron ore, which has come off a high of US$222/tonne in July to now trade at US$129/tonne.

Prior to this, it had rallied around 100% from November 2020 to May 2021, hitting an all-time high of US$229.50/tonne.

However, legislative efforts from China to curb steel production and control harmful emissions has drastically reduced the demand for iron ore in the last few months.

More than 80% of China’s domestic steel mills were closed in September, mostly due to maintenance. As such, iron ore prices sunk by about 50% in Q3 2021.

This has translated negatively for the Rio Tinto share price, as it’s an ASX resource that produces iron ore.

As such, its share price can and does fluctuate with the volatility in iron ore prices. With this recent weakness, it is unsurprising to see the effects on Rio’s shares, given that we saw the opposite when iron ore rallied from a low of US$116/tonne last year.

Rio shares had climbed $43 per share in the single-year period to August 2021, or 48%, as iron ore sent it through the roof.

One leading broker isn’t too fazed about the recent downturn in iron ore pricing, and actually foresees it as a good thing for Rio Tinto.

Can RIO Tinto shares recover again?

Analysts at leading investment bank JP Morgan certainly believe so. The top broker believes Rio Tinto’s share price is bolstered by its exposure to the base metal – especially when it begins to weaken in price.

Not only that, the bank reckons that Rio’s dividend yield is attractive, offering a forward yield above 10%. In such a low-rates and low-yield environment, this kind of number sticks out.

It also sees China’s geopolitical factors being a tailwind to Rio shares, once they settle and the growth outlook improves there.

JP Morgan believes “investors will be well rewarded owning the stock, particularly once we see China growth sentiment improve”, which it states will “most likely (be) after the Winter Olympics in February 2022”.

Yet, despite the bullish outlook, JP Morgan trims its price target on Rio Tinto shares, in line with weaker commodity forecasts.

It now holds a buy rating with a price target of $144, down from $150, but still around 33% implied upside potential from the broker’s valuation.

The Rio Tinto share price has struggled this year to date, and finds itself 10% in the red from January 1, after gaining only 6% this past year.

However, it is still trading above the majority of its 2019 and 2020 levels and is well off its 52-week high of $137.33.

The post Why this top broker says the Rio Tinto (ASX:RIO) share price is a buy despite weak iron-ore outlook appeared first on The Motley Fool Australia.

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The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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