Broker snap: Rio Tinto remains cheap, Nomura sees buyback in 2015

27th Sep 2013 10:45

Nomura has reiterated its 'buy' rating and 3,700p target price for diversified mining group Rio Tinto, saying that the company may be able to find the happy balance between growth and returns.The broker said that Rio remains one of the cheapest stocks within its peer group, trading at just nine times 2014 earnings.It said that the downside scenario for Rio is if the company continues to invest in growth without reasonable returns to shareholders.Nomura said: "With the market hungry for cash returns, but with attractive options still in the pipeline, the challenge for Rio Tinto's management is to correctly balance the demands of investors versus the requirements of running a multi-decade business. "As with other new management teams in the sector, Rio Tinto's management appears to be 'talking the talk' on capital efficiency and productivity gains. Although costs savings are welcome and encouraged, it is the rolling off of capital commitments that will be the key to seeing the free cash flow generation expand."Even with the current expansion projects, the broker sees a "modest drop-off" in capital expenditure over the coming few years. However, it reckons the earliest shareholders will likely see a buy-back will be around the time of the 2014 results in February 2015. This should be around $3-4bn in magnitude.The stock was down 2.24% at 3,070p by 10:44 on Friday, in line with the wider sector as metals prices edged lower.BC