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Rio Tinto shares: top broker remains bullish before FY19 results

Heading into Rio Tinto's FY19 results release, we examine Macquarie Wealth Management's current stance on the mining giant.

Rio Tinto share price Source: Bloomberg

Macquarie Wealth Management remains bullish on Rio Tinto’s (ASX: RIO) prospects as we head towards the release of the company’s full-year results – today reiterating their Outperform rating and a price target of $107.00 on the mining giant.

RIO's FY19 results will be released after the market-close, on 26 February, at approximately 17:00 AEDT, Sydney time.

Optimistic research however couldn’t save equities from bearish investors today, as Rio Tinto saw its share price collapse amid broader concerns around the spread of the Coronavirus.

By 14:00 AEDT, the Rio Tinto share price had fallen a significant 2.65% to $95.10 per share.

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The Macquarie thesis in view

Overall, the investment bank continues to like the stock even after Rio Tinto recently revised their CY20 shipment guidance downward. The miner now expects CY20 shipments in the 324 million tonnes and 334 million tonnes range – a downgrade driven by the disruption caused from Tropical Cyclone Damien to the company's Pilbara Network.

Rio Tinto previously expected to ship 330 million tonnes to 343 million tonnes of iron ore in the calendar year.

Speaking of this downgrade, Macquarie analysts noted that: ‘The cut to shipment guidance is disappointing and is likely to see RIO record a 4% decline in iron-ore shipments from the Pilbara over a two-year period.’

Even so, the investment bank remains upbeat overall, saying:

‘We believe there is the potential for RIO to surprise on cash returns to shareholders,' during their full-year results.

Rio Tinto share price: fundamentals unpacked

For income-focused investors, Macquarie is expecting a CY20 dividend yield from Rio Tinto of 5.5%; before this figure declines to 4.2% and 3.9% in CY21e and CY22e, respectively.

Looking at the breakdown of RIO’s earnings (EBITDA), Macquarie provides us with some interesting insight. Unsurprisingly, over the last five years, Rio Tinto has derived 60% of its earnings from iron ore, 17% from aluminium, 12% from copper & diamonds and 11% from energy & minerals.

Yet maybe what is somewhat surprising is Macquarie’s prediction for the next five years: here the investment bank posits that RIO will see its reliance upon iron ore deepen – rising 8% to 68% of EBITDA overall; aluminium is set to fall to 12% of earnings, copper & diamonds to 10% and energy & minerals to 10%.

This comes as companies such as BHP Group have warned that iron ore prices will likely remain volatile over the next couple of years.

On that front, Macquarie is currently modelling that iron ore prices will drift to the US$84 per tonne mark in CY20, US$70 in CY21e, US$68 in CY22e and rebound slightly to US$71 in CY23e.

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