The mining sector is “undervalued” and “poised to outperform” as China recovers from its recent state of lockdown, broker Jefferies said in an analyst note today.
The investment bank has raised price forecasts for iron ore and coal and upgraded a swathe of mining companies from Hold to Buy.
Anglo American PLC (LSE:AAL), Rio Tinto PLC (LSE:RIO), BHP Group Limited (LSE:BHP) all got a bump-up.
Jefferies raised the target price on Anglo American to 4,500p, up from 3,850p.
BHP Group’s target price was also increased to 3,100p, up from 2,500p.
The price target for Glencore PLC (LSE:GLEN), which remains a Buy, was also raised, as was Rio Tinto.
Although recent demand from China has been weak due to the impact of its latest Covid-19 outbreak, the country is now relaxing lockdowns and rolling out monetary stimulus.
Jefferies anticipates that “mining shares will likely be volatile” as China comes out of hibernation, but that the environment should shift to a place of synchronised “recovery in global demand”.
While iron ore shipments fell in the first quarter of 2022, with little organic growth, an uptick in Chinese demand could lead to a further lift in prices, Jefferies said.
Copper mining production also dropped in the first quarter and total volumes are expected to be low for the rest of the year.
Its coal price forecast is based on a "lack of supply growth" as many companies are winding down coal activities.
Commodity prices, it expects, will be “rising to new highs”, although the pace of recovery could take a decade to be realised.
Jefferies said that supply constraints continue to hamper the mining industry and that capital expenditure in the industry has been at recessionary levels for the past six years.
However, the broker said it expects mining to “outperform as the US and Euro economies slow” amid high inflation and rising interest rates.
“Macro risks are still clearly elevated as an economic hurricane could be coming, but we would buy the miners to ride out the storm and maximize leverage to the subsequent recovery,” Jefferies said in the note.