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Analysts upbeat on Rio Tinto numbers as commodity price recovery could bring 'significant' upside

Analysts looked at RioTinto this week as the miner saw higher production across most of its portfolio in thesecond quarter, with the most notable increase coming from its bauxiteoperations, which climbed 13% year over year to 12.1 million tonnes.

Aluminum output grew 11% to 911,000 tonnes and aluminaproduction jumped 6% to 2.0 million tonnes. Copper production was up 5% at141,000 tonnes. Iron ore production rose 8% to 80.9 million tonnes andshipments shifted up 6% to 82.2 million tonnes.

Following the release of Rio Tinto's production results,Sanford C. Bernstein lowered its EPS forecast for the miner, at US$2.01 fromUS$2.20 for 2016 and to US$3.73 from US$4.14 in 2017.

"[T]he company can cope with significantly lowercommodity prices as it operates some of the world's best assets, while leverageis low," analysts at Bernstein said in a July 22 note. "Also, theupside still remains significant if commodity prices recover — although not assignificant as companies operationally and financially more levered."

Bernstein maintained its outperform rating for Rio Tinto andset a target price of 2,520 pence per share.

Meanwhile, Investec Securities placed a buy tag on shares ofRio Tinto, and set a target price of 2,948 pence per share.

"[R]io Tinto has implemented rigorous cost-cutting andasset optimization program that now leave it on an ever-strengthening financialfooting as commodity prices improve," the bank said in a July 19 note. "Increaseddividends above current market expectations and above its stated 40-60% ofearnings 'through the cycle' look increasingly likely and we can see capacityto deliver a 5% yield at spot commodity prices."

Investec added that Rio Tinto remains its preferreddiversified major.

RBC Capital Markets, which viewed Rio Tinto's second quarteriron ore shipments as "slightly ahead of expectation" and the company'scopper division as showing "strong performance," maintained itssector perform rating for the stock, with a target price of 2,200 pence pershare.

"Focus now shifts to cost target achievement in whatare the maiden results for new CEO Jean-Sebastien Jacques. We expect a shift instrategy moving Rio back towards measured growth," RBC said in a July 20note.

The bank forecast a marginal increase of around 1% in RioTinto's 2016 EBITDA.

In a separate July 20 note, RBC also looked at the secondquarter production resultsof Anglo American Plc.It rated the stock sector perform with a price target of 814 pence per share.

Year-over-year iron ore production from Rio Tinto'sMinas Riooperations jumped 91% to 3.5 million tonnes during the quarter, while outputfrom Kumba Iron Ore Ltd.decreased 12% to 8.9 million tonnes.

The total second-quarter iron ore output of 12.4 milliontonnes was below the bank's 13.6 million tonnes forecast.

Meanwhile, Anglo American's copper production from theretained operations was down 22% to 144,200 tonnes, broadly in line with RBC's147,000-tonne forecast.

Due to the impact of severe weather at , the company cutits 2016 and 2017 copper forecast to a range of 570,000 tonnes to 600,000tonnes, from initially 600,000 tonnes to 630,000 tonnes and 590,000 tonnes to620,000 tonnes, respectively. RBC's book showed estimates of 610,000 tonnes and640,000 tonnes, respectively.

While Anglo American's production numbers were "slightlydisappointing" on the iron ore and copper front, the results did notmaterially change Bernstein's view of the stock.

"Execution of the restructuring effort and disposalsprocess remain key to the investment case. We maintain our outperform rating,"the research firm said in a July 20 note.

Investec analysts downplayed the impacts of the mixedproduction results, saying that year on year declines in output were largely afunction of adjusting production profile for a tougher environment."Impact to consensus numbers should be relatively minor," theanalysts said July 20.