BHP Group PLC (LON:BHP) shares were dented on Tuesday lunchtime after UBS downgraded the miner to ‘neutral’ from ‘buy’, saying an expected fall in commodity prices would cap upside in the shares.
In a note, UBS said the FTSE 100 firm’s shares were up 15% in the year-to-date on the back of higher iron ore prices, which rose to a three-year high in early April, however these were expected to “fall back” over the next 12 months amid a normalisation of supplies from Australia and a recovery in output from Brazil.
READ: BHP joins Rio Tinto in cutting its 2019 iron ore output to reflect the impact of tropical cyclone Veronica
The bank’s analysts also said prices of metallurgical coal, used to produce high grade coke for steelmaking, would moderate over the next six months as supplies lifted after two years.
Overall, UBS said geopolitical and commodity price movements would be “the key driver” of BHP’s share price in the near-term, adding that the risk/reward profile was “no longer compelling” despite expectations that the group would return over US$5bn to shareholders over the six months to June.
BHP is already over halfway to this target, having paid out a £2.6bn (US$3.38bn) special dividend to shareholders in the first quarter of the year.
“We expect [BHP] to return all excess cash to shareholders with FY2019 results as [mergers and acquisitions] options are limited,” the bank said, although this was not enough to offset the expected fall in commodity process.
UBS also retained its price target for BHP at 1,869p.
BHP shares were down 0.6% at 1,858.2p.