Rio Tinto Shares Rally Following Morgan Stanley's Upgrade To Overweight

Rio Tinto plc (ADR) RIO rallied as much as 5 percent after Morgan Stanley upgraded the stock to Overweight on revised iron ore prices and share price weakness.

"The recent equity price weakness, favorable cost curve position, and sound financial position allow us to be more constructive. We upgrade RIO to OW," analyst Brendan Fitzpatrick wrote in a note.

RIO is the highest margin global producer of iron ore, which accounts for about 60 percent of the company's EBITDA.

"[A]lthough, we expect the iron ore price to be lower in late 2016, our long term view on the commodity remains constructive," Fitzpatrick highlighted.

The analyst said the recent equity price weakness drove much of the upgrade along with the 7 percent increase in target price from the revised commodity prices. The target price on the stock was raised to A$55.50 from A$52.00.

"The current equity price is 10% below the outcome we generate on a spot price scenario. Undoubtedly there is some macroeconomic and commodity price risk, but RIO's primary exposure, iron ore, seems least at risk," the analyst noted.

The analyst also raised his iron ore price forecasts by 17 percent and 13 percent in CY16 and CY17, respectively, while his copper price forecasts have been downgraded by between 13 percent and 8 percent over CY16-CY19.

In addition, shares could rally on advancing the Oyu Tolgoi copper mine expansion and lowering the capex estimate.