How much upside does Macquarie tip for Rio Tinto shares?

Rio Tinto Ltd (ASX: RIO) shares are having a strong session on Thursday.

In afternoon trade, the mining giant's shares are up over 2.5% to $138.88.

Investors have been bidding its shares higher after the copper price climbed to a new record high overnight.

Can its shares keep rising? Let's see what analysts at Macquarie Group Ltd (ASX: MQG) are saying about the miner.

What is the broker saying?

Macquarie is feeling positive about Rio Tinto's outlook and believes there are still opportunities for the miner to continue to improve its business. It said:

Although RIO has outperformed BHP in Australia, we think there is scope for continued underlying business improvement at this week's Capital Markets Day (CMD) via: A streamlined operating model – Deploying roles back to assets, reducing overheads and bureaucracy; Iron ore cost out – a transformation program may look to close the FCF gap to BHP from ~US$7-8/t to ~US$4/t. Unlocking copper growth – including OT ramp-up, Kennecott U/G options, Resolution and Codelco JV opportunities. Ally optimisation – Value chain optimisation in aluminium leading to more bauxite exports and re-powering of Tomago and Boyne. Lithium rationalisation – Deferring hard rock decisions and uncommitted brine capital, assessing DLE potential.

In light of this, the broker continues to prefer Rio Tinto over rival BHP Group Ltd (ASX: BHP). This is due partly to BHP's latest failure to reach a deal for copper miner Anglo-American (LSE: ALL). It notes that it continued interest in Anglo-American could be interpreted as dissatisfaction with its own copper portfolio. It adds:

We continue to prefer UK based RIO both at home (ASX) and away (LSE). Whilst expectations of RIO's improvement may be priced in, BHP's recent AAL move may see continued discounts due to perceived copper program flaws. BHP will need to demonstrate a suitable investment case to turn the tables.

Should you buy Rio Tinto shares?

While Rio Tinto is its preference, it still only has a neutral rating and $130.00 price target on its shares. This is below its current share price, which could indicate they have peaked for the time being.

Commenting on its recommendation, Macquarie said:

Neutral. With Fe supply growth, we think RIO will announce a simplified operating model at this CMD and reduce costs to buffer returns to shareholders. We continue to prefer RIO to BHP over a six-month outlook, with BHP's riskier catalyst backdrop outweighing superior asset quality.

TPs increase to A$130/£50ps for ASX/LSE on higher Ebitda and iron ore NPV increase. Unchanged valuation approach (50/50 Ebitda multiple/NAV).

The post How much upside does Macquarie tip for Rio Tinto shares? appeared first on The Motley Fool Australia.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool Australia has recommended BHP Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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