HSBC downgrades Rio Tinto, Anglo American on valuation

"The strong share price performance and normalising valuations, along with an average declining near-term earnings profile leads us to re-evaluate our views on the UK diversified miners," it said.

"Copper is trading around fundamental support levels following a circa 8% recovery to nearly USD6,200/t (USD2.80/lb) and we believe upside is limited as positioning has already moved and we see the market transitioning to surplus from 2021e.

"While we see near-term iron ore price support, we maintain our view of reducing market tightness in the coming years and for prices to revert back towards marginal cost levels in the mid-USD60s."

The bank downgraded Anglo American and Rio to ‘hold’ from ‘buy’, cutting the price targets to 2,300p from 2,350p and to 4,630p from 4,725p, respectively.

It said Anglo and Rio are the two best-performing global diversified miners, up around 30% year-to-date in US dollar terms. HSBC reckoned the shares are fairly valued at current levels, hence the downgrade.

"Our over 10% average forecast annual iron ore price decline in 2020/21e leads to a declining earnings profile, particularly at Rio, and resulting in lower free cash flow generation as capex spending also rises.

"Anglo’s more diversified asset base and favourable platinum group metals exposure provides for a more stable earnings profile. These companies are in top shape with robust balance sheets and we expect shareholder returns to remain a key feature. However, we see limited near-term catalysts and upside from current levels."

BHP and Glencore were held at ‘hold’ and ‘buy’, respectively, but their price targets were reduced to 1,780p from 1,820p and to 275p from 280p.