UBS turns bearish on miners, says ‘sell’ BHP, Rio Tinto

Tom RichardsonMarkets reporter and commentator

Dec 13, 2022 – 4.44pm

Save

Share

Optimism around a faster reopening timeline for China, a retreat in the US dollar, and slowing pace of interest rate increases means many blue-chip ASX mining stocks are overvalued, according to UBS.

Melbourne-based analyst Lachlan Shaw told investors to sell iron ore, copper, and coal giant BHP Group, with its shares up 36 per cent since the end of in October in US dollar terms.

UBS resources analyst Lachlan Shaw. James Alcock

“We believe the stock has moved too far, too fast,” Mr Shaw cautioned. “The macro backdrop is still fragile with global growth slowing and China’s reopening challenging in winter, iron ore fundamentals are still weak, and the stock is expensive at normalised commodity prices.”

Despite the “sell” call, UBS increased its 12-month price target on the $233 billion miner 12.7 per cent to $35.50, with the stock off 1.7 per cent to $46.01 on Tuesday.

The broker said it views the current iron ore price at around $US112 a tonne as extended after a 37 per cent rise on China’s incremental easing of lockdown and travel restrictions since October.

RELATED QUOTES

BHPBHP Group

$46.080 -1.52%

1 year1 day

Dec 21Jun 22Dec 2236.00045.00054.000

Updated: Dec 13, 2022 – 6.08pm. Data is 20 mins delayed.

View BHP related articles

RIORio Tinto

$114.100 -1.93%

Dec 21Jun 22Dec 2275.000105.00135.00

UBS forecasts iron ore prices to hold slightly above $US100 a tonne over the first half of calendar 2023, and retreat to around $US95 a tonne in the final quarter of 2023, as seasonal demand and supply output shifts prices.

Based on its forecast, UBS estimates BHP will pay total dividends of $US2.03 in calendar 2023, equivalent to a capital return of around $US10 billion ($14.8 billion).

“In our opinion, a [less than] 7 per cent dividend yield is not compelling for a cyclical stock with limited growth in the current interest rate environment,” it said.

The broker also downgraded Rio Tinto to “sell” on valuation grounds after a sentiment-driven rally helped shares climb 38 per cent since October. It increased its valuation 5.6 per cent from $90 to $95, with Rio shares changing hands for $114.10.

UBS expects Rio Tinto to give final approval to its problem-plagued Simandou iron ore project in Guinea, Africa, over the first half of 2023.

The coveted deposit is the largest and richest untapped high-grade iron ore deposit in the world and UBS said new supply from the project may equal a small negative for the medium-term outlook for iron ore prices.

The broker expects total iron ore supply to lift by 45 million tonnes in 2023 and pointed to prices around $US75 a tonne between 2016 and 2019 as a reference point for oversupplied markets.

It is also “sell” rated on Fortescue Metals with an $18.70 valuation on the shares.

Other commodities

While bearish on iron ore, the broker said gold, coal, zinc and lithium should prove more resilient for investors in 2023.

It said gold is positioned to benefit from a US Federal Reserve pivot and expects prices to rally as real interest rates decline in tune with the US dollar against major Group of 10 currencies. Gold fetched $US1794 an ounce on Tuesday.

“Our preferred commodities benefit from the energy crisis (thermal coal, zinc, aluminium) or have an attractive medium-term outlook – lithium, copper, nickel,” the broker said.

It is “neutral” rated on BHP takeover target and copper producer Oz Minerals, and downgraded West Australian copper producer Sandfire Resources to “neutral” on valuation grounds.

“We lift our 2023 copper prices on improving macro and downgrades to 2023 mine supply guidance and refined bottlenecks in China that reduce forecast 2023-24 surpluses; albeit we would wait for a more attractive entry point,” it said.

Lithium and green metals businesses, being the sharemarket’s hottest sector in 2022, could also be in for another good year in 2023, according to UBS.

It said miners supplying the raw materials for batteries have an attractive medium-term outlook and tipped battery grade lithium carbonate prices to average $US52,500 a tonne in 2023, before retreating to $US30,000 a tonne in 2024.

The forecast for 2024 is roughly in line with consensus and well ahead of bearish brokers like Goldman Sachs.

UBS kept a “buy” rating on South America-based lithium brine producer Allkem for exposure to the growth in demand for electric vehicles. However, it downgraded Mineral Resources from “buy” to “neutral” on valuation grounds and kept a “sell” on Pilbara Minerals.

Australia’s benchmark S&P/ASX 200 Resources Index is up 11.6 per cent in 2022 and has advanced 55.9 per cent over the past five years.