Deutsche downgrades Rio Tinto after 'powerful' re-rating

DB said its upgrade to buy in mid-2020 was based on stronger for longer iron ore prices and an attractive valuation with compelling near-term cash yields.

"The surge in iron ore prices to peak levels last seen in2011 has seen a significant re-pricing across the forward curve," the bank said. It added that near-term cash flows are compelling and market leading but close to peak and not sustainable.

Deutsche said that while it is always tempting to break from its tried and tested mid-cycle valuation approach at cyclical peaks and troughs it believes this would be a mistake.

"The iron ore market remains fundamentally tight with supply challenges that could persist beyond 2021, but we see a normalisation pathway through H2'21 and 2022 on slowing demand and latent capacity growth," it said.

The bank lifted its price target on the stock to 6,000p from 5,100p.