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Rio Tinto, Vale shareholder returns could surge: Morgan Stanley

Timothy MooreOnline editor

Feb 5, 2021 – 9.08am

If current high spot iron ore prices persist, they could prove the catalyst for a further windfall for shareholders of Rio Tinto and Vale, in particular, according to Morgan Stanley.

“Iron ore equities have returned about 30 per cent in total shareholder returns since the start of 2020,” Morgan Stanley said in a note reviewing shares of iron ore miners and its bull case for iron ore prices.

Morgan Stanley is very bullish on Rio Tinto. Rio Tinto

While Morgan Stanley said copper producers offer a more compelling investment case given the secular growth angle of the metal, “iron ore miners’ out-sized free cash potential could still support some (absolute) upside”.

Morgan Stanley calculates an average spot free cash flow yield of 19 per cent for the global majors in 2021, which could rise to 22 per cent under its bull price scenario.

“With balance sheets rapidly approaching a net cash position (BHP and Rio Tinto) and strict capital allocation frameworks in place, companies are well positioned to deliver out-sized cash returns.”

Morgan Stanley said equities are pricing in a long term iron ore price range of $US54 to $US70 a tonne; Morgan’s long term base case price is $US64 a tonne and its bull case price is $US110 a tonne. It sees the potential for prices to top $US170 a tonne through 2023.

The difference between those prices at which equities are trading today and Morgan’s long term price range for the steelmaking material “could yield a disproportionate 60 to 200 per cent upside to share prices”, the firm said.

The spot price of iron ore, according to Fastmarkets MB, was $US158.03 a tonne on Thursday.

Morgan Stanley’s bull case forecasts iron ore will average $US215 a tonne in 2021, $US190 a tonne in 2022 and $US170 a tonne in 2023. It previous bull forecasts were: $US149 in 2021; $US116 in 2022; and, $US84 in 2023.

In terms of Rio Tinto’s share price specifically, Morgan Stanley looks at the London-traded shares.

Morgan Stanley’s base case has Rio at 5140p, the bull case is 12,260p and the bear case is 2450. Rio closed at 5648p in London trading on Thursday.

The bull case share price forecast includes a full recovery in aluminium margins to 40 per cent, Morgan said. The base price share price forecast include a 75 per cent total dividend payout for 2020.

All IMHO, DYOR