Rio Tinto (RIO +3.1%) surges to its highest level since May 2008 after J.P. Morgan and Barclays both upgraded the stock.
J.P. Morgan raises Rio to Overweight from Neutral, saying outgoing CEO Jean-Sébastien Jacques has left the miner with a “best-in-class balance sheet.”
JPM analyst Dominic O’Kane says Rio’s cash flow is now “ring-fenced” for dividend distribution at 10% free cash flow yield, with the current 8% dividend yield making the case for a further re-rating.
“Strategic stasis means M&A tail risks are eliminated and capex is highly transparent in a ~$6B-$7B range for 2020-22 due to a lack of projects,” O’Kane writes.
Also, Rio is upgraded to Equal Weight from Underweight at Barclays, which predicts iron ore prices will stay higher for longer.
Rio is highly leveraged to iron ore, with every $10 change in commodity price delivering $18 change in 2021 EPS, Barclays says, adding that only Vale (VALE +1.6%) has higher leverage, with a $25 change in EPS per $10 iron ore move.
CEO Jean-Sébastien Jacques recently said he will step down in the wake of mounting criticism over Rio’s destruction of sacred Aboriginal rock shelters.
