Has iron ore run its course: Citi's take on three heavyweight miners

Who knew that iron ore could rally like a cryptocurrency, up more than 70% from the late October 2022 low of US$73.60 a tonne.

The V-shaped move has helped iron ore majors post some rather outsized gains with BHP (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue (ASX: FMG) up a respective 33%, 41.7% and 53% over the same time period.

Iron ore and major miners' 12-month performance (Source: TradingView)

Alongside the share price strength behind the big four banks. These seven stocks have helped push the ASX 200 to within 2% of all-time highs.

Citi analysts said there's still upside risk to miners' FY23 earnings at spot commodity prices and as a result, "there's no compelling reason to reduce aggregate sector weightings".

However, not all iron ore miners are made equal, with large cap names attracting both buy, hold and sell ratings.

Iron ore miner ratings

Citi's valuation methodology treats these iron ore miners as "no-growth cyclicals" and how they're currently valued against long-term average price-to-book ratios.

The analysts note that Rio Tinto is trading in-line with its price-to-book, while Fortescue at a premium and Champion Iron (ASX: CIA) at a discount. BHP was not covered.

Citi's key points

"Stepping off the re-opening trade": Citi's Commodity team believes its time to move on from the China re-opening trade in iron ore as the value of open interest on the Dalian Commodity Exchange has returned to recent peaks (June quarter 2022 levels). The analysts expect iron ore prices to somewhat moderate to US$120 a tonne on a zero to three month view.

It's been buy, buy, buy: The analysts note that 12 month forward EPS revisions for BHP, Rio Tinto and Fortescue have been negative since mid 2022. More broadly speaking, negative EPS revisions tend to correlate with share price underperformance. However, "expectations around China re-opening have been a powerful sentiment driver with risk appetite strongly positive for all the iron ore names over this period."

Upside to earnings: At current spot prices, Citi estimates EPS upgrades to around 80% of its mining coverage for 2H23 results. Of note, BHP's FY23 PE contracts to 8.7 times at spot prices versus its base case of 11.3 times.