HSBC has advised mining companies to invest in technology or be left behind and has identified Rio Tinto PLC (LON:RIO) as the sector's technology champion.
Rio Tinto has led technology adoption with autonomous mine and rail operations driving sustainable productivity gains, the bank’s mining team said as HSBC upgraded its recommendation on the banking giant to ‘buy’ from ‘hold’.
READ: Deutsche Bank cuts Rio Tinto to ‘hold’ from ‘buy’, thinks medium-term iron ore demand risks will limit re-rating
HSBC noted that having recently exited from coal production, more than half of its discounted cash flow (DCF) value is in iron ore, so it lacks the diversity of the other miners, “but this is offset by the inherent quality of its Pilbara iron ore assets and low-cost aluminium operations,” HSBC declared.
Given its asset quality, it trades at a premium to the other London-listed diversified miners.
The bank’s DCF-derived price target has been increased to 5,100p from 4,700p, to take into account the bank’s revised, higher iron ore price estimates.
This Australian train has no driver @RioTinto #Australia #AutonomousVehicles @dez_blanchfield #ai pic.twitter.com/I0QhCbUL5W
— Evan Kirstel (@evankirstel) June 20, 2018
In contrast, it has downgraded sector peer South 32 Limited (LON:S32) to ‘hold’ from ‘buy’, even after increasing the target price to 240p from 225p, saying it sees limited upside, given the group’s underlying asset quality and the risk inherent in its recent investment in early-stage and development projects.
“South 32 is balancing cash returns with investment in markets which have strong fundamentals, a strategy we like. We think cash generation and returns to shareholders support the investment case, but owing to the relatively lower quality of its asset base, it trades at a discount to the other LSE diversified miners,” HSBC said.
Shares in South 32 were up 0.1% this morning at 209.4p while Rio Tinto was up 0.2% at 4,130.5p.