BHP too 'expensive' for JP Morgan, rivals preferred

In a note published on Monday on metals and mining, the bank said: “BHP stands out as the only diversified [miner] valued in line with its historical multiples.

“Though we expect BHP will follow Rio Tinto in raising shareholder returns, it has inferior balance sheet capacity over the medium term, in our view, due to likely petroleum ‘capex creep’ and a less defensive balance sheet.”

JP Morgan added that BHP "screens expensive" after outperforming fellow FTSE 100 miner Rio by 12% since January 2018, and was now "the only diversified not trading at a substantial discount versus its late cycle average multiple".

It has therefore cut its rating on BHP to ‘underweight’ from ‘neutral’, with a share price target of £19.50. It reiterated its ‘overweight’ ratings on Rio and Anglo American.

JP Morgan also argued that the 15% increase in iron ore prices since the dam collapse at the Feijao mining complex in Brumdinho, Brazil last month was “over-extended” as it believed only around 8m tonnes of output would be lost by Vale in 2019. Vale, one of the world’s biggest iron ore producers, said last week it would temporarily reduce annual production as it replaced dams across Brazil.

JP Morgan did concede, however, that supply would still be “tighter and more vulnerable” and raised its iron ore forecasts for 2019 by 10%, to $70 a ton, and by 6% to $65 ton in 2020.

As at 2.30pm GMT, BHP's share price was largely flat at £17.12.