Goldman Sachs downgrades its rating to "Neutral" after Rio Tinto's stock price surges 60%

Investing.com - Goldman Sachs has downgraded Rio Tinto Plc from “Buy” to “Neutral” and lowered its 12-month target price by 6% from £79 to £74 per share. The mining company’s stock has surged approximately 60% over the past six months, and the broker believes the stock has now reached full valuation.

Goldman Sachs set the target price using an equal-weighted blend of 1x net asset value and 5.5x EV/EBITDA. The net asset value has decreased 7% from £99.5 to £92.6 per share, with the stock currently trading at 0.77x net asset value. Based on the current price of 7,122 pence, the target price implies a 3.9% upside.

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Rio Tinto announced 2025 underlying EBITDA of $25.4 billion and after-tax net profit of $10.9 billion, below Goldman Sachs’ expectations of $25.9 billion and $11.2 billion, respectively, and 1% below Visible Alpha consensus data. EBITDA grew 9% year-over-year.

Aluminum EBITDA was $4.4 billion, about $700 million below Goldman Sachs’ forecast, due to rising North American primary aluminum costs (even excluding tariff costs) and lower bauxite revenue. Primary aluminum costs increased approximately 15% YoY.

Copper performance exceeded expectations by $400 million, reaching $7.4 billion, mainly driven by stronger-than-expected results from Escondida and Bingham Canyon. Iron ore met expectations, with Pilbara unit costs falling to $23.4 per ton in the second half of 2025.

Net debt of $14.4 billion exceeded Goldman Sachs’ forecast of $12.9 billion, due to higher-than-expected capital expenditures of $12.3 billion, including spending on Simandou InfraCo and MineCo, versus an earlier estimate of $11.4 billion.

The final dividend of 254 cents per share, totaling $4.1 billion, marks the tenth consecutive year of a 60% payout ratio, below Goldman Sachs’ expectation of 269 cents per share.

On guidance, Rio Tinto maintained its 2026 production and capital expenditure outlooks. The Pilbara unit cost guidance is $23.5-$25 per ton, compared to Goldman Sachs’ expectation of $24.3 per ton.

Copper net credit cost guidance is $0.65-$0.75 per pound, versus Goldman Sachs’ expectation of $0.61 per pound. The total capital expenditure guidance for 2026 remains around $11 billion.

Goldman Sachs lowered its EBITDA forecasts for 2026, 2027, and 2028 by 2%, 1%, and 2%, respectively, citing rising aluminum cost assumptions. Its current EBITDA forecast for 2026 is $27.1 billion, with earnings per share of $7.08. Goldman Sachs expects aluminum and copper (together accounting for about 40% of 2026 EBITDA) to decline in the second quarter of 2026. The spot free cash flow yield is approximately 6%, in line with BHP, which also receives a neutral rating from Goldman Sachs.

Rio Tinto received an additional tax assessment of approximately $440 million from Mongolian tax authorities covering fiscal years 2021 and 2022, on top of the $438 million already paid.

Goldman Sachs estimates that the potential additional payments now total over $1 billion. The company states that the new assessment is inconsistent with the Oyu Tolgoi investment agreement.

Regarding a potential merger with Glencore, management said the deal “was originally a comprehensive merger including Glencore’s coal business, but compared to its attractive simplified strategy, it is not financially worthwhile.”

Rio Tinto has begun market testing its borates and titanium dioxide assets as part of a plan to divest non-core assets worth $5-$10 billion, along with an annual cost reduction target of $650 million, and a mid-term capital expenditure cut of about $1 billion to $10 billion.

The mining company’s stock has risen 40.7% over the past 12 months, while the FTSE World Europe Index increased 16.7% during the same period. Since coverage began in January 2024, Goldman Sachs has maintained a buy rating.

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