JP Morgan stays at underweight on BHP, ups target price
BHP Billiton’s reduced forecasts for iron ore production led JP Morgan to further trim its projections for output in 2017, but the broker continued to believe the miner’s valuation premium was “difficult to justify”.
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Australia-focused BHP cut its production guidance for fiscal year 2016 from 270 metric tonnes to 260 metric tonnes (JP Morgan: 262Mt).
On top of that, a 24-month rail maintenance programme led analyst Fraser Jamieson to downgrade its fiscal year 2017 production forecast by 5Mt.
Together with Rio Tinto JP Morgan decided to lower its 2017 estimate for supply by approximately 15Mt from 108Mt.
Risks surrounding ramp-ups at Vale and Roy Hill meant there was additional downside potential to estimates and possible upside for price forecast.
As of 21 April JP Morgan was forecasting an iron ore price of $42/Mt in 2017.
“We continue to see BHP’s valuation premium relative to RIO as unjustified and retain our UW recommendation,” Jamieson said.
However, the analyst revised its price target on BHP higher from 665p to 780p to reflect higher spot prices.
To justify similar 2017 EV/EBITDA multiples for both firms’ oil prices would need to be trading at about $65 per barrel or $100 per barrel at spot prices.