Citi upgrades Rio Tinto to 'buy'

Citi upgraded Rio Tinto on Thursday to ‘buy’ from ‘neutral’ and hiked the price target to 5,300p from 4,600p as it argued that the case for expanded capital returns has strengthened.

The bank said that while it expects a modest price pullback in iron ore in the near term, it now forecasts benchmark iron ore to stay in a range of $100-$120/t for the balance of 2020, given that ongoing strength in China now drives a more broadly balanced seaborne market, versus a notable surplus previously.

Citi also lifted forecasts for 2021-23 based on a more constructive Chinese steel demand outlook.

It said its discounted cash flow valuation increases by 20% to 5,200p a share on a higher long-term iron ore price of $60/t.

"We believe Rio shareholders can benefit from 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)," it said. "We see a further potential for special dividends."