Goldman Sachs recently raised its iron ore price forecasts to US$120 a tonne for 2023 with a three month target of US$150. The outlook is backed by assumptions that the seaborne market will swing into a 'significant deficit' of 43 million tonnes in the first half amid lower seasonal supply from Australia and Brazil and an expected recovery in Chinese demand.
In this article, we break down why Goldman is so bullish on iron ore, and their rating updates for ASX iron ore miners.
Iron ore inventories at Chinese steel mills are at their lowest levels since 2016.
In parallel, China's home sales rose for the first time in 20 months in February, with the value of sales across the 100 biggest real estate developers up 14.9% year-on-year. Goldman notes that "generally property sales lead starts which drives higher steel demand."
Chinese steel demand is rising in-line with seasonal movements (demand falls in February due to the week-long Lunar New Year holiday).
Rio Tinto (ASX: RIO) was the only BUY rated iron ore major with a $140.40 target price. The stock was also added to Goldman's Conviction List due to:
Compelling relative valuation vs. peers (trades at 0.9x net asset value compared to BHP at 1.05x and Fortescue at 1.5x)
Strong free cash flow and dividend yield
Strong production growth from iron ore and copper (projecting 8% copper growth in 2023 and 5% in 2024)
Potential for free cash flow per tonne improvement in Pilbara operations in 2023 with Gudai-Darri and over the medium-to-long term with Rhodes Ridge
For the uninitiated, Gudai-Darri is Rio Tinto's 17th and 'most technically advanced iron ore mine' in the Pilbara region. It was opened in June 2022 and expected to reach a nameplate of 43 million tonnes this year.
Rhodes Ridge is another Pilbara-based prospect with a 5.8 billion tonne high grade Mineral Resource (62.3% Fe). A resource drilling program is currently underway to support future project studies.
The $4 billion market cap Champion Iron (ASX: CIA) was also BUY rated with an $8.80 target price. The broker notes Champion's 2022 production profile of 7.9 million tonnes of high grade (66% Fe) iron ore, which is set to double to 15 million tonnes with the ramp up of Bloom Lake Phase 2.
BHP (ASX: BHP) and Mineral Resources (ASX: MIN) were both NEUTRAL rated.
The analysts noted how BHP's Pilbara business has generated more free cash flow per tonne than peers over the past few years. This outperformance is expected to average US$10 a tonne higher than Rio Tinto and US$15 a tonne higher than Fortescue over the next 3-5 years, underpinned by lower capital intensity and higher grades/margins. However, a Neutral rating and $48.30 target price was maintained due to valuation, lower production grade vs. peers and lower free cash flow vs. Rio Tinto.
As for Mineral Resources, the expected decline in lithium prices in the second half of 2023 is set to offset stronger iron ore prices. The broker noted 'compelling' near term volume and earnings growth but low free cash flow across FY24 and FY25. The target price was increased from $83.00 to $86.00.
Finally, Fortescue (ASX: FMG) was SELL rated with a $15.5 target price as rising Chinese steel prices and mill margins will result in widening price realisations for low grade 58% Fe products.
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