Macquarie says the price of iron ore is trading below its short-term price forecasts and presents downside risks for all iron ore miners for FY23-24.
Iron ore prices tumbled -12% last week and closed below US$80 a tonne this Monday, a level not seen since May 2020.
"The market sentiment remains weak on the arrival of the weak season and an uncertain Covid-19 policy outlook in China. Chinese property sales continued to struggle despite easing policies, against the backdrop of COVID lockdown disruptions," Macquarie analysts said in a note on Tuesday.
Chinese steel margins continue to sit in negative territory, which is a major contributor to weak demand for the steelmaking ingredient. Though, "their profit loss narrowed last week thanks to the plunge in the iron ore price."
Smaller miners were viewed as players that were "more leveraged to iron ore price movements and have greater downside risks".
Towards the large cap end of town, Rio Tinto (ASX: RIO) was forecast to have an earnings downside risk of 27% in FY23 and 23% in FY24 while BHP (ASX: BHP) had potential earnings downsides of 21% and 12% over the two years.
Mineral Resources (ASX: MIN) was the only name that had exposure to meaningful earnings upside due to its growing lithium operations, with upside of 10% and 37% in FY25 and FY26 respectively.
"BHP is our preferred large cap exposure as the company boasts stronger organic growth options," said Macquarie.
"Our positive view on Mineral Resources is unchanged despite the weaker outlook for iron-ore as the impact is outweighed by our strong outlook for lithium."
"Deterra Royalties (ASX: DRR) offers low volatility exposure to iron-ore via its royalty derived from BHP’s production at Mining Area C which is tracking ahead of schedule."
Ticker | Company | Rating | Target price |
---|---|---|---|
BHP | BHP | Outperform | $45.00 |
RIO | Rio Tinto | Neutral | $95.00 |
FMG | Fortescue Metals | Underperform | $14.50 |
MIN | Mineral Resources | Outperform | $98.00 |
CIA | Champion Iron | Neutral | $5.50 |
DRR | Deterra Royalties | Outperform | $4.60 |
MGX | Mt Gibson Iron | Neutral | $0.40 |
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