On Monday, HSBC revised its price target on shares of mining giant Rio Tinto Plc (NYSE:RIO:LN) (NYSE: RIO), reducing it to £5,150 from the previous £5,400, while reaffirming a Hold rating on the stock. The adjustment was based on a new valuation that considers both discounted cash flow (DCF) and forward EV/EBITDA multiples.
The firm's analysts have updated their valuation methods for Rio Tinto, with the DCF now set at 4,942p, using a weighted average cost of capital (WACC) of 9.9%, which is an increase from the former 9.5%. The 12-month forward EV/EBITDA valuation has been calculated at 5,374p, applying a multiple of 5.75x, a reduction from the previous 6.00x multiple.
The decision to modify the price target stems from anticipated growth in the company's operations at Oyu Tolgoi in Mongolia, which focuses on copper, and Simfer in Simandou, Guinea, which is known for iron ore. However, HSBC notes that these projects are associated with above-average risks, prompting a more conservative outlook on Rio Tinto's future performance.
In light of these risks, the analysts have opted to raise the WACC to 9.9% from 9.5% and decrease the EV/EBITDA multiple to 5.75x from 6.00x. The firm maintains its Hold rating, suggesting that the risk-reward balance for Rio Tinto's shares is fair at the current level.
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