Miners look cheap says UBS but will struggle to go higher suggests unless metal prices take off again, which the Swiss broker reckons is unlikely.
Valuations across the sector are underpinned currently by the level of commodity prices but UBS is sceptical over the prospect of Chinese demand driving a further upsurge and believes the risks are on the downside from the second quarter of 2022 onwards as supply starts to grow.
Strong cash returns being generated will support prices this year while further out there is some underpinning. due to the fact that currently elevated metal prices are not priced in.
Higher inflation should also help prices as will a global economic recovery, but UBS sees no reason to change its long term price target for iron of US$70/t or example.
It calculates Rio Tinto PLC (LSE:RIO), BHP PLC and Anglo American PLC (LSE:AAL) are discounting an iron ore price of $90/t and after the recent rebound 'we do not see compelling value at this level'.
Copper miners are pricing in a price of $3.25-4.00/lb, which relative to a year ago makes for more attractive valuations but even for companies such as Antofagasta, it is not yet compelling.
On a cash return basis, Glencore PLC (LSE:GLEN) and BHP are the most attractive options in the sector but GLEN has coal headwinds to deal with adds UBS.