Rio, BHP and Glencore upgraded by Liberum as "fair value" reached

Analysts at Liberum have upgraded mining majors Rio Tinto, BHP Billiton and Glencore as the sector approached "plausible fair value", but reiterated Anglo American's 'sell' rating.

Liberum now has a 'hold' rating on three of the FTSE 100 mining giants, with BHP Billiton's given a price target 1,250p, Rio Tinto at 1,380p and Glencore 200p, while Anglo's stands at 680p.

The analysts expect mining fundamentals to continue to deteriorate into the second half as demand conditions worsen, supply in some key commodities accelerates and dividends come under pressure.

"However," wrote analysts Richard Knights and Ben Davis, "valuation sensitivity to a set of feasible long-run assumptions suggests risk/reward is fairly evenly poised; iron ore downside looks largely priced in at BHP and Rio and valuation sensitivity to a range of feasible longrun copper prices looks skewed to the upside."

The pair said recent shifts down in long-run price expectations of iron ore and thermal coal, driven by cost deflation, had resulted in large negative revisions to sector valuations.

But now that deflating cost structures are better understood, the sensitivity of companies net present values (NPVs) to plausible price outcomes "is a more reliable marker of value".

The analysts suggested that the NPV downside from further falls in the iron ore price, with Australian dollar moves, is "limited" at BHP and Rio, while valuation sensitivity to feasible long-range copper prices is skewed to the upside.

"As Australia’s largest export by value and the driver of its terms of trade, any long-run assumption of iron ore
prices needs to be attached to an AUD assumption. Our analysis suggests most reasonable downside scenarios for an iron ore/AUD combination reflect limited NPV downside for Rio and BHP."

"For Anglo, lump premiums and the Rand make conclusions more complex."

The barometer will be copper, which has seen long-term margin expectation rise.

"Changes to copper price sentiment being the largest swing factor to sector valuation going forward."