RBC Capital downgrades Antofagasta, Rio Tinto

RBC Capital Markets has cut its rating on both Antofagasta and Rio Tinto as the coronavirus outbreak weighs down global demand for commodities.

The bank has reduced the miners to ‘underperform’ from ‘sector perform’ and cut its price targets from 850p to 740p for London-listed Antofagasta and from 3,800p to 3,300p for dual-listed Rio Tinto.

RBC said in a note on North American base metals that "mining equities and commodities could remain under pressure in the near term, as the market digests the impact of the coronavirus outbreak, and we have lowered our near term base metals and iron ore forecasts".

Looking specifically at Rio Tinto, analyst Paul Hissey said: "Following an assessment of the impact from the coronavirus, we no longer expect a high iron ore price environment in the first half, and remove our tactical ‘sector perform’ rating. In a rebalanced iron ore market we see potential for compression in Rio’s equity value."

He continued: "We see a sharp drop in Chinese domestic iron ore production helping the market to stay balanced in 2020, which should also see an acceleration of demand in the second half. We lower iron ore prices by 6% in 2020 and increase by 8% in 2021."

In a note on Antofagasta, meanwhile, RBC analysts Tyler Broda and James Bell said: "Antofagasta faces the unenviable position of facing lower copper prices at a time of weaker grades and high requirement for capex.

"Although we think this counter-cyclical investment makes economic sense, it leaves the equity vulnerable over the coming 12 months."

Broda and Bell added that copper markets were currently "finely balanced" and that any positive changes to the fundamental picture could see copper prices rally.

"Higher copper prices would lower the impact of the current capex spending programme," they said.

But they also noted that copper prices could move lower "should the coronavirus impact shock inventories further than our base case".

Commodities have been under pressure ever since the coronavirus first emerged in Wuhan, China, at the end of December. China is one of world’s the biggest commodity importers, but the country’s economy is coming under pressure as the authorities look to contain the outbreak.