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Goldman Sachs switches mining horses, upgrading its rating on Rio Tinto, downgrading its stance for BHP

The US investment bank upped Rio to 'buy' from 'neutral' and lifted its price target to 5,000p from 4,100p, with the shares currently trading at 4,302.50p, up 0.4% on Monday’s close
Iron ore
Goldman downgraded BHP to 'neutral' from 'buy' and cut its price target to 1,800p from 2,000p following recent outperformance

Goldman Sachs has switched horses on two blue-chip miners, upgrading its rating on Rio Tinto PLC (LON:RIO) and downgrading its recommendation for BHP PLC (LON:BHP).

The US investment bank upped Rio to 'buy' from 'neutral' and lifted its price target to 5,000p from 4,100p, with the shares currently trading at 4,302.50p, up 0.4% on Monday’s close.

READ: Rio Tinto raises target for iron ore exports this year after meeting guidance in 2018

In a sector review, Goldman’s analysts think Rio is set to benefit from higher iron ore price, noting that since the breach of a tailings dam at a Vale-owned iron ore mine last month, iron ore prices have risen by around 16%.

They said: "Given ongoing uncertainty that this has created over the outlook for iron ore supplies, we expect the iron ore price to remain elevated, at least in the short term. The impact of this on earnings is likely to be greatest for Rio Tinto, which derives more than 70% of its EBITDA (2019E) from iron ore."

The bank’s analysts downgraded BHP to 'neutral' from 'buy' and cut its price target to 1,800p from 2,000p following recent outperformance, with the shares trading at 1,728.60, up 0.2%.

They pointed out that BHP outperformed Rio by 14% between March 2018 and January 2018, thanks to strong price momentum for BHP-specific commodities such as oil, the sale of its onshore oil assets and the strengthening of its portfolio.

The Goldman analysts pointed out that that following the sale of BHP's onshore oil assets and the return of much of the proceeds to shareholders, there is little in the way of potential catalysts for the company, aside from a sustained increase in commodity prices.

In addition, they reckon BHP's first-half results could disappoint the market as far as shareholder returns and net debt are concerned.

Overall for mining stocks, the analysts said the Goldman view is unchanged. "In general, companies have repaired their balance sheets and have modest forward capex commitments, meaning strong free cash flow generation (at current prices) should translate into higher returns, in the form of dividends/buy-backs."

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