JP Morgan downgraded BHP to ‘underweight’ from ‘equal weight’ with a target price of £19.80 per share, saying BHP is now the only diversified miner not trading at a substantial discount versus its late cycle average multiple.
In reaction, shares in BHP fell 1.15% to 1,700p in morning trading.
The broker otherwise remains positive on the investment case for UK diversified miners due to substantial discounts compared to historical multiples and the market. However, JP Morgan said valuations and investment themes are diverging.
“Rio and Anglo American remain cheap even if iron ore prices fall 25% to US$65 per tonne (respectively 5.1x & 4.5x 2019 enterprise value/EBITDA),” JP Morgan said.
JP Morgan noted that iron ore prices have risen by 15% to US$87 per tonne since the dam near the Brazilian Feijão iron ore mine – owned by the nation’s largest mining company, Vale – collapsed last month.
This is a price JP Morgan believes has “over-extended” as it forecasts just 8mln tonnes in lost output from Vale in 2019 as a result of the dam failure.
“Nevertheless, we see tighter and more vulnerable supply and raise iron ore price forecasts +10%/+6% to $70/t / $65/t CFR for 2019/20E,” it said.