Liberum double-upgrades miners after 'stark change' in iron ore price forecasts

Analysts at Liberum took a fresh look at the mining sector on Friday, double-upgrading the likes of Rio Tinto, Anglo American and BHP to 'buy' as they outlined a "stark change" in their near-term forecasts for iron ore prices.

Following an analysis of the source of iron units that have fed the gap between weak Chinese iron ore imports and record crude steel production in China over the past year, they now saw iron ore prices averaging $90 a tonne over the first six months of 2019 and $110 per tonne during the second half of the year.

In fact, they now saw a risk that iron ore prices might shoot past $110 per tonne in the back half of 2019.

The investment bank pointed out how the Chinese steel industry has had to increasingly rely on unsustainable sources to provide its iron units, despite a rapidly growing recycling industry and accelerating scrap usage.

Nevertheless, for the near-term they retained a cautious stance on Chinese end-user demand.

And while the credit cycle was turning - with early signs similar to the last three major monetary stimulus - its analysts believed that a repeat in the size of the credit growth as seen in the past three cycles was "unlikely", but said that trade war pressures increased the possibility of "more accommodative monetary policy, which tends to be investment driven and more metal intensive than exports."

At an individual company level, Liberum double-upgraded Rio Tinto from 'sell' to 'buy' and hiked its target price on the group from £33 to £55, forecasting a full-year EBITDA of $28bn for the group, 40% above consensus estimates.

For Anglo American, Liberum saw the firm disproportionately benefiting from disruptions to the seaborne iron ore market from both a price perspective and lower freight rates, leading it up it from 'sell' to 'buy' also and raise its price target from £14 to £22.

As far as BHP was concerned, Liberum raised it from 'sell' to 'buy' and upped its target price from £13 to £20, forecasting EBITDA of $30.5bn for the year ended June 2020, 19% above consensus.