Broker snap: Canaccord upbeat about shareholder returns at Rio Tinto

27th Nov 2013 11:10

Canaccord Genuity has cut its target price for mining group Rio Tinto but has kept a 'buy' rating, saying that the stock is still 'cheap'.The broker said that despite falling commodity prices, rising volumes should drive earnings before interest, tax, depreciation and amortisation (EBITDA) to $28bn by 2016, up from the $21.4bn expected this year.This will be helped by rising production volumes with the 360m-tonnes-per-annum iron ore expansion moving towards full capacity and the Bingham Canyon and Grasberg projects seeing substantial production recoveries.However, analyst Peter Mallin-Jones said that he is making some revisions to his model: "slowing the recovery in volumes at Grasberg, slowing the underground development at Oyu Tolgoi as well as reflecting the Clermont disposal in our estimates. These drive the small reductions in our estimates."As such, the target price has been cut from 4,100p to 4,000p.Nevertheless, the broker still sees upside in the share price: "The steady uplift in EBITDA means that we see the forward multiples of earnings and cash flow RIO shares trade at fading down. This is contrasted by a steadily rising dividend yield as the higher earnings and falling net debt allow management to see steady dividend growth over the next few years."Mallin-Jones said that Rio is the only company among the miners it covers at which future cash returns are expected to be roughly equivalent to those earned in the past. The rest are only forecast to return cash at a fraction of the level generated historically."We believe Rio Tinto shares offer investors strong management and advantaged assets combining to drive a growing dividend. Its investment programme should give relatively fast and good quality growth over the next few years as we expect copper and iron ore volumes to pick up."The stock was up 1.56% at 3,158.5p by 11:10 on Wednesday.BC