Analysts at Berenberg have reiterated a 'sell' rating and 4,000p price target on Rio Tinto PLC (LSE:RIO) shares as they feel the FTSE 100-listed miner remains a dividend risk, and more so if iron ore does not rally on any China support.
The German bank's analysts noted that the 20th National Congress of the Chinese Communist Party, which will end on October 22, is expected to announce an economic stimulus, but this has not happened yet.
Instead, they added, President Xi Jinping has reiterated support for the country’s zero-COVID-19 policy, which has tended to be a headwind to economic growth, and make fairly cautious comments on the global economy, while the National Bureau of Statistics of China has delayed the release of key economic data due this week, such as Q3 GDP, which the analysts said could be because there is "a fairly good chance that this is because the data were weak and would thus undermine the spirit of the congress".
The Berenberg analysts said: "Should the president not announce the anticipated stimulus, we think there is scope for commodity prices to soften, particularly if China is not there to support global demand in the face of a weak US and Europe. This would likely be something that occurs following the end of the conference – that is, in the week commencing 24 October."
The analysts said their base case assumption was for stimulus, pushing iron ore prices to US$105 per tonne for Q4 2023, which compares to
US%92 per tonne currently. If Chinese stimulus does not materialise, they see no reason for iron ore to rally above US$100 per tonne, particularly after Brazil's Vale delivered a better-than-expected Q3 operational performance.
The Berenberg analysts noted that their forecast for Rio Tinto's dividend this year is 50.6% for a payout of US$4.26 per share, which is 9% below consensus of US$4.69 per share. For 2023, they are at US$2.37 per share for a 50% payout - with the range 40-60% through the cycle - which is 38% below consensus of US$3.84 per share.
They said if they mark-to-market iron ore prices for Q4 2022 and for 2023, their dividend forecast falls by 4% this year and a further 11% next.
The analysts said: "We adjust our estimates for the quarter, with a small negative impact, mainly due to i) iron ore coming down to the bottom end of the guidance range, and ii) refined copper guidance being cut by 21% at the midpoint and costs rising by 14% at the midpoint; we
expect a production impact in 2023 due to refinery maintenance at Kennecott (US)."
"With a deteriorating macroeconomic outlook, a subdued iron ore price and consensus dividend expectations too high (in our view), we remain comfortable with our Sell recommendation and GBp4,000 price target (implying 16% downside), and see potential for elevated selling pressure in the shares in the absence of stimulus. Rio is trading on 5.7x 2023E EBITDA and 1.58x NAV," they concluded.