Rio Tinto shares set to soar despite CEO exit, says Citi analysts

Rio Tinto saw its CEO step down on Friday over the destruction of a sacred Aboriginal cave, but the debacle is unlikely to derail its performance, with analysts from Citi upgrading their outlook for the stock this week.

  • Rio Tinto CEO steps down over destruction of sacred Aboriginal cave
  • Citi analysts upgrade outlook for Anglo-Australian mining company
  • Rio Tinto stock expected to soar and potential for ‘special dividends’

Rio Tinto shares could take a hit over the short-term after their CEO Jean-Sébastien Jacques was forced to resign after the mining giant destroyed the Juukan rockshelters, a sacred Aboriginal site in Western Australia.

‘I would like to thank J-S for his strong leadership of the Group since becoming chief executive in 2016,’ Rio Tinto chairman Simon Thompson said. ‘His leadership during the Covid-19 pandemic, in particular, has been exemplary.’

‘Rio Tinto is a financially and operationally robust business with world-class assets, a clear strategy and outstanding people,’ he added. ‘We are determined to learn the lessons from Juukan and to re-establish our reputation as a leader in communities and heritage management.’

Rio Tinto is trading 4% higher to $49.84 per share at the time of publication, with the stock up 10% year-to-date.

Citi analysts upgrade Rio Tinto outlook

Despite the debacle, Rio Tinto is well-positioned to see its share price soar in the months ahead, with analysts from Citi upgrading their rating for the stock from ‘neutral’ to ‘buy’ and significantly increasing its target price for the stock from £46 per share to £53 earlier this week.

Based on the stock trading at £49.84, analysts at the US-based investment bank believe the company has a potential upside of 6%.

The bank said that it expects a slight slide in iron ore prices over the near-term, but thinks that the commodity will stay within a relatively tight range of between $100-$120 per tonne for the remainder of 2020.

‘We believe Rio shareholders can benefit from a strong balance sheet coupled with high leverage to iron ore pries driving near term cash generation (FCF of more than 9% over the next three years),’ Citi said in a note. ‘We see a further potential for special dividends.’

Rio Tinto remains ‘agile and adapted’ amid Covid-19

Overall, the mining company has delivered a strong performance amid the coronavirus pandemic, with the company generating underlying EBITDA of $9.6 billion and a margin of 47%, driven by its strong and stable operations throughout the first half of 2020.

As a consequence, the company has awarded shareholders with an interim dividend of $2.5 billion, which equates to $1.55 per share and is on track to hit its 2020 production guidance across all commodities.

‘Our world-class portfolio of high-quality assets and our strong balance sheet consistently serve us well in all market conditions and particularly in turbulent times,’ former Rio Tinto CEO J-S Jacques said in the company’s half-year results in July.

‘This, together with our disciplined capital allocation, underpins our ability to sustain production, increase our investment in the business, pay taxes and royalties to governments and continue delivering superior returns to shareholders,’ he added.

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