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Deutsche Bank cuts Rio Tinto to ‘hold’ from ‘buy’, thinks medium-term iron ore demand risks will limit re-rating

In a note to clients, the German bank’s analysts said: “The iron ore market faces medium-long term headwinds from peaking demand and rising scrap use in China”
Mining machine
Deutsche Bank left their target price for the FTSE 100-listed stock unchanged at 4,700p, with Rio shares currently trading at 4,460p

Deutsche Bank has cut its rating for blue-chip miner Rio Tinto PLC (LON:RIO) to ‘hold’ from ‘buy’ as it thinks medium-term risks to iron ore demand will limit re-rating potential from current levels.

In a note to clients, the German bank’s analysts said: “The iron ore market faces medium-long term headwinds from peaking demand and rising scrap use in China.”

READ: Barclays switches horses on mining giants, downgrading Rio Tinto, upgrading BHP Billiton

They added; “While we believe some of the bear scenarios on rapidly rising scrap consumption are premature, we expect Chinese iron ore import demand to peak around 2020, limiting growth potential from the majors.”

As a result, the analysts said, they have cut their iron ore production assumptions for Rio Tinto from 2021 onwards from more than 380mln tonnes per annum (mtpa) to “a more gradual creep” above 360 mtpa.

The analysts pointed out that following a significant rebound for the sector through the second quarter of this year, Rio’s shares have re-rated versus their peers following a successful strategy of asset sales, deleveraging and high cash returns.

However, they noted, Rio’s high cash returns should continue to provide valuation support, and following recent divestment announcements, they have increased their 2018/19 buyback estimates from around US$2.9bn/US$3.0bn to US$4.4bn/US$5.2bn.

The analysts left their target price for the FTSE 100-listed stock unchanged at 4,700p, with Rio shares currently trading at 4,460p, up 0.9% on Friday’s close.

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