RBC Capital gave a slight lift to Rio Tinto PLC (LON:RIO) shares on Wednesday, upping its rating for the mining giant to ‘sector perform’ from ‘underperform’ following its mean-reverting underperformance versus the FTSE 350 mining index over the past three months, and in light of its attractive dividend.
The broker also raised its target price for the FTSE 100-listed stock to 4,200p, up from 3,600p previously, with the shares currently trading at 4,580.50p, albeit up 0.2% on Tuesday’s close.
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In a note to clients, RBC’s analysts said: “With a more balanced view on iron ore markets and slower decline in price forecasts, we see little impetus to sell with positive macro tailwinds and sector valuation dynamics, combined with an attractive 2020 dividend yield.
“We continue to take a cautious view of the longer-term outlook for iron ore, but for now we expect RIO shares to show resilience.”
They added: “We have written at length on the structural medium-term challenges facing the world's iron ore markets, a commodity where RIO is overweight in exposure. However, recent Chinese stimulus has rapidly driven steel production to record levels as policymaker reality takes charge.
“As we outline in detail on this deep dive on iron ore markets, higher Chinese demand has placed iron ore into a more balanced market than our previously too conservative forecasts suggested.”
As a result, the analysts said: “We increase our iron ore prices to average $87/t for 2020 ($77/t previously), with Q3 at $90/t, and we now don't expect long-term prices until mid-2021, which reduces the rationale for our prior negativity on a 12-month view. There are now more upside risks from sustained demand/limited swing supply than downside risks versus our base case.”
The RBC upgrade managed to counter a downgrade in rating from bigger US investment bank Goldman Sachs, which moved its rating for the miner to ‘neutral’ from ‘buy’ after reducing its target price to 4,440p from 4,720p.