Barclays downgrades Rio Tinto, cites several near-term headwinds

(Sharecast News) - Barclays downgraded Rio Tinto on Tuesday to 'equalweight' from 'overweight' and cut the price target to 6,600p from 6,885p, citing a number of near-term headwinds. Barclays said it believes iron ore prices are currently close to the peak of seasonality which typically sees prices progressively decline until Q4, implying Rio's earnings momentum is likely to wane from here.

It also said that Rio has significantly outperformed key peer BHP since the start of Q4.

"While Rio still trades at a discount to BHP on price-to-earnings and free cash flow yield, it is now at parity on EV/EBITDA as a result of the recent rally, leaving Rio at the tightest valuation discount to BHP seen since 2020 on EV/EBITDA," it said.

The bank also said it believes the strategic challenge that Rio's approach to Glencore highlighted - a lack of copper growth options post 2030 - is one that is not easily solved other than via M&A.

"Hence we believe Rio is likely to be seen as a potential future acquirer of copper assets to address that gap," it said.

Barclays said the potential catalyst of $5-10bn of asset sales is likely to take time, while the targeted NPV lift from value release is insufficient to offer material upside to its valuation.

The bank also said that chief executive Simon Trott sees no rationale for separating iron ore from the rest of the business to liberate value.

"With modest 8% downside to our downwardly revised price target of 6600p following FY25 results, we cut Rio from OW to EW and prefer Anglo American and Glencore which remain our key ideas in the sector," it said.