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UBS scraps ‘buy’ recommendation for Rio Tinto, expects iron ore prices to slide in 2019

The Vale tragedy has pushed iron ore prices up, but UBS expects producers outside of Brazil to pick up the slack over the coming months
iron ore mine
Iron ore prices are currently above US$80/tonne but UBS thinks they will average US$74 this year

UBS has scrapped its ‘buy’ recommendation for Rio Tinto PLC (LON:RIO), citing a likely downturn in iron ore prices over the next six months.

Rio shares have risen by more than a fifth so far in 2019, with the growth underpinned by iron ore prices, which have jumped following the Vale tragedy in Brazil in January.

But UBS expects to see prices average US$74 per tonne in 2019 versus the current US$88/t spot price.

READ: Rio shares on BoA downgrade

“We expect the spot iron ore price to fall over the next six months with disruption in Brazil likely to have only a short-term impact on the market given the limited demand growth & offset from inventory, scrap & latent capacity,” read a note to clients.

“We expect this to cap upside the share price (despite attractive returns), especially given the long-term concerns over China property demand & scrap sUBStitution.”

Speaking of shareholder returns, analysts believe Rio can sustainably pay out 7% of its market cap – almost US$4bn – even if iron ore prices fall to US$55/t.

Despite the prospect of “attractive returns”, UBS reckons weak iron ore prices will “cap upside [to] the share price”.

The investment bank concluded that the “risk/ reward is no longer compelling despite high cash returns” as it moved Rio to ‘hold’ from ‘buy’. UBS did keep its 4,500p price target in place, though.

Rio shares rose 0.7% to 4,473p in late-morning trading on Wednesday.

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