UBS has raised its target price for resources giant Rio Tinto and kept its 'buy' rating, saying that the stock is its preferred pick of the UK diversified miners.

A tour of some of Rio's assets in the US and Canada last month highlighted that one-off costs are masking the group's true underlying performance, UBS said in a research report.

"The cost line within a number of Rio Tinto's assets has been increasing materially over the last couple of years. For example, KUC costs had increased from US$919m in 2009 to US$1,526m in 2011.

"But 2011 included one-off third party concentrate purchases of US$200m. Study costs for operational improvements at KUC and IOC were also being expensed, which inflated the cost line."

Lower costs and better pricing in mineral sands means that the broker has raised its earnings forecasts for 2013 and 2014, up 4.4% and 2.8%, respectively. The NPV (net present value) estimate has been raised by 1% to $74.53 per share.

As such, UBS has hiked its target price from 4,600p to 4,700p in line with the change in NPV assumptions.

The broker said that Rio "offers the greatest leverage [within the UK diversified mining sector] to a recovery in commodity demand in China, which we expect to occur from Q4 12 as large infrastructure projects approved earlier in 2012 take hold."

By 11:16, shares were trading 2.38% higher at 3,055.5p.

BC

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