Rio Tinto Ltd (ASX: RIO) shares are bucking the broader market selling trend today.

Shares in the S&P/ASX 200 Index (ASX: XJO) miner closed yesterday trading for $111.96. Shares are currently swapping hands for $112.50, up 0.5%.

While stockholders will welcome today’s lift, there could be some far larger gains ahead for Rio Tinto shares.

That’s according to Goldman Sachs.

The broker has a buy rating on Rio Tinto with a target price of $136.20. That represents a whopping 21% upside to the current Rio Tinto share price.

Five reasons the ASX 200 miner’s share price could surge

Rio Tinto doesn’t solely mine iron ore.

Although the industrial metal remains its biggest revenue earner, Rio also produces aluminium, copper, mineral sands, diamonds and lithium. And the ASX 200 miner owns some of the largest and lowest-cost mining operations in the world.

Rio’s recently reported first-quarter results revealed record Pilbara iron ore shipments of 82.5 million tonnes, up 16% year on year. The miner reported it was well positioned to meet the high end of its full-year production guidance range.

Which brings us to the first reason Goldman Sachs believes Rio Tinto shares could be poised to surge 21%: “compelling relative valuation”.

Rio trades at around 0.9 times its net asset value (NAV). That compares to around 1.0 times NAV for BHP Group Ltd (ASX: BHP) shares and around 1.5 times NAV for Fortescue Metals Group Ltd (ASX: FMG) shares.

The second reason Rio Tinto shares could leap higher over the year is the miner’s “strong free cash flow (FCF) and dividend yield”.

According to Goldman’s estimates for FY23 and FY24, “FCF/dividend yield in 2023E (c. 10%/7% yield) & 2024E (c. 7%/6% yield) driven by our bullish view on iron ore, aluminium and copper prices.”

The third reason Goldman is bullish on Rio is the forecast for strong production growth in 2023 and 2024.

According to the broker’s analysts:

Rio is a FCF and production growth story in our view, with forecast Cu Eq production growth of ~6-7% in 2023 & 2024 driven by the acquisition of TRQ, the Gudai-Darri iron ore mine ramp-up to nameplate in 2023 and a rebound in aluminium production post labour and equipment challenges.

Then there’s the turnaround at Pilbara, the fourth reason Rio Tinto shares could leap 21% higher.

Noting Pilbara represents approximately 50% of RIO’s NAV, Goldman said it’s optimistic about:

The potential for FCF/t improvement in the Pilbara in 2023 with Guida-darri and over the medium to long run driven by Rhodes Ridge, and RIO recently outlining a Pilbara turnaround story with a medium term capacity target of 345-360Mt by 2026 (GSe 350Mtpa by 2030 with Rhodes Ridge).

And the fifth reason Goldman is optimistic on the outlook for Rio is the miner’s “compelling high margin low emission aluminium exposure”.

The broker notes that, “Rio has the world’s highest margin low emission aluminium business, with over 2.2Mt of Ali production powered by hydro.”

How have Rio Tinto shares been tracking?

Rio Tinto shares are down 3% in 2023 as the big rebound in iron ore prices from the November lows has begun to reverse.

The ASX 200 miner’s share price is up 28% since iron ore hit recent lows on 1 November.

The post 5 reasons Rio Tinto shares could surge 21% appeared first on The Motley Fool Australia.

(function() {
function setButtonColorDefaults(param, property, defaultValue) {
if( !param || !param.includes(‘#’)) {
var button = document.getElementsByClassName(“pitch-snippet”)[0].getElementsByClassName(“pitch-button”)[0];
button.style[property] = defaultValue;
}
}

setButtonColorDefaults(“#43B02A”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43B02A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#fff”, ‘color’, ‘#fff’);
})()

More reading

• Brokers say these ASX 200 mining shares are top buys
• Why the iron ore price is ‘not out of the danger zone’
• Top ASX passive income shares to buy in May 2023
• The Rio Tinto share price dumped 7% in April. Here’s why
• 2 ASX 200 mining shares to buy for big dividends: analysts

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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 Scott Phillips.

from The Motley Fool Australia https://ift.tt/b6oPyHT

• Stock Market