Analysts at UBS have downgraded their ratings for BHP Group Ltd (LSE:BHP, ASX:BHP) and Rio Tinto PLC (LSE:RIO) to 'Sell' from 'Neutral' as they think both FTSE 100-listed miners have seen their stock move "too far, too fast".
In a note to clients, the Swiss bank's analysts said: "In our opinion, the macro backdrop for commodities & the miners improved in November when China started to ease Covid restrictions & announced meaningful property stimulus; this was boosted by the Fed pivot & the USD starting to weaken."
They pointed out that mining stocks and commodity prices have responded aggressively with BHP up 36% and Rio Tinto up 28% since end-October in US dollar terms, while iron ore prices are up 37% to $112 per tonne.
To reflect this, the UBS analysts said they have raised their commodity price forecasts and upgraded full-year 2023 EBITDA estimates for BHP by 23% and for Rio by 13%.
However, they added, "the macro backdrop is still fragile with global growth slowing & China's reopening challenging in winter, iron ore fundamentals are still weak".
Therefore, they feel both BHP and Rio shares look expensive at normal prices with a FCF (free cashflow) yield of more than 5% at $80 per tonne iron ore.
The analysts said they believe Rio "is starting to improve operationally ... but iron ore is the key driver". The UBS price target for Rio has been raised to £50 from £46.
In late afternoon trading on Tuesday, Rio was trading at £57.64 with BHP at £25.67.