Citi upgrades BHP, Fortescue despite sliding iron ore prices
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The news: Citi analysts have upgraded mining giants BHP and Fortescue despite benchmark iron ore prices sliding to new lows this week.
The numbers: Citi upgraded BHP to 'buy' as normalised multiples were looking "cheap enough". However, its target price was kept unchanged at $46 given its recent share price decline.
At midday AEDT, BHP shares were down 2.2% to $42.13.
Citi also upgraded Fortescue to 'neutral' with an unchanged target price of $24. Analysts maintained their 'buy' rating for Rio Tinto, noting it was still the cheapest of the large iron ore exposures with the highest mid-term production growth.
Fortescue shares were 3.2% lower at $23.74, with Rio losing 3% at $115.59 by midday AEDT on the ASX.
World steel consumption in 2022-23 has been around 10% lower than trend consumption levels. But Citi noted that excluding China the steel industry is expected to recover in 2024-25.
Citi outlined growth prospects for all three companies, with 2030 copper production growth up 15% for Rio Tinto, 10% for Fortescue, and flat for BHP.
The context: On Monday, the ASX 200 tumbled 1.8% as BHP, Rio Tinto and Fortescue led the sell-off. Iron ore prices have fallen by around a quarter from a peak in early January as China’s real estate and manufacturing activity remains under pressure.
What they said: The analysts noted that the difficulties for the three largest miners was the likelihood of falling market share in the long term given infrastructure constraints at their Pilbara operations.
"For these companies maintaining production growth in line with trend commodity consumption growth (which for most commodities is near that of steel) is a major challenge/impossibility given the scale of their operations," they said.
"All three will need to growth their ex iron ore businesses at a high rate to provide anywhere trend growth in underlying production."
The source: Citi research report
