RBC Capital upgrades Rio Tinto, highlights attractive dividend yield

RBC Capital Markets upgraded its stance on shares of miner Rio Tinto to ‘sector perform’ from ‘underperform’ on Wednesday, hiking the price target to 4,200p from 3,600p.

The bank said it continues to prefer other exposures in Anglo American and BHP, but has upgraded the stock following its mean-reverting underperformance versus the FTSE 350 mining index and in light of its attractive dividend yield.

"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," it said.

"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."

RBC noted that it has written at length on the structural medium-term challenges facing iron ore markets, to which Rio is overweight in exposure.

"However, recent Chinese stimulus has rapidly driven steel production to record levels as policymaker reality takes charge," it said. "Higher Chinese demand has placed iron ore into a more balanced market than our previously too conservative forecasts suggested."

The bank lifted its iron ore prices to average $87/t for 2020 from $77 previously.