Rio Tinto is a copper monster in waiting: Morgan Stanley

Morgan Stanley believes Rio Tinto could increase copper production from its Mongolian operation by 10% in the next five years - and that the market is underpricing the impact this will have on its stock.

The iron ore and lithium miner owns 66% of the Oyu Tolgoi project and began underground production in March this year.

Morgan Stanley, which has an OVERWEIGHT rating on the company, believes the market is underestimating the impact copper earnings could have on the company over the next five years. 

Source: Morgan Stanley

“We currently value RIO's copper division at a (implied) multiple of 9.9x on CY23, although this looks rich when compared to the current peer multiple average of 8.0x for CY23. We note that given the strong growth in the business, this rapidly declines to ~5.4x by 2025, lower than CY24 multiples for peers at 7.1x, hence creating an opportunity for a re-rating of the business as growth crystallises,” analysts wrote yesterday.

They also predict that copper earnings could help Rio Tinto’s dividend yield increase from 5.2% to 5.9% under its base case scenario. 

The prediction is particularly bold given more than 70% of Rio’s current earnings come from iron ore. This new prediction suggests copper’s contribution to the Rio balance sheet could triple in under three years.

Source: Morgan Stanley

Analysts also believe the company can reach this goal through M&A.

“Value-accretive M&A remains 'on the menu' for Rio Tinto as it seeks to enhance its growth pipeline; the company has identified copper and lithium as key commodities where it seeks to grow,” the analysts wrote, while adding that the company has commented in the past that it will likely not pursue acquisitions through other listed miners arguing this avenue does not bring enough benefit for its cost. 

The broker has a price target of $124 a share, the second-highest among the major brokers tracked by FNArena after Goldman Sachs (which has a punchier $130 price target).

Market Index’s Broker Consensus widget labels Rio as a BUY, with 11 Buy, 9 Hold, and 2 Sell ratings as of the last update on 1 June 2023.