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Rio Tinto upgraded to 'buy' by SocGen on stronger commodity price outlook

The price target has been lifted to 4,400p from 3,600p on the back of the French broker’s “more constructive” stance on iron ore
Shipping iron ore
SocGen said its previous forecast of an iron ore price of US$45 a tonne is beginning to look overly bearish.

Societe Generale has raised its valuations for all the diversified miners on the back of a stronger commodity price outlook and upgraded Rio Tinto PLC (LON:RIO).

Rio is SocGen’s second top pick in the sector behind Glencore PLC (LON:GLEN), following an upgrade to ‘buy’ from ‘hold’.

READ: Generosity of mining companies driving dividend payments towards annual record

The price target has been lifted to 4,400p from 3,600p on the back of the French broker’s “more constructive” stance on iron ore in the context of stronger-than-expected Chinese demand and a bit of discipline on the part of producers.

SocGen said its previous forecast of an iron ore price of US$45 a tonne is beginning to look overly bearish.

“Although iron ore is likely to stay under pressure in the coming months, given looming seasonal curbs in Chinese steel output, we would watch for potential opportunities to build exposure to Rio should the stock be hit by sentiment,” SocGen said.

Of course, Rio Tinto would not be a diversified miner were it purely an iron ore play, and the French finance house notes that copper and aluminium are set to become increasingly important drivers of value for Rio over the next five to 10 years as commodity prices continue to recover and the company delivers on key growth projects.

READ: Rio Tinto hit with FCA fine over financial reporting process for Mozambique purchase; US, Australian regulators also investigating

The upshot is SocGen thinks near-term earnings prospects belie the long-term growth potential, with an improving free cash flow translating over time into stronger cash returns for shareholders.

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