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These 3 global miners are too pricey, says Morningstar

Mathew Hodge, CFA  |  16 Oct 2018Text size  Decrease  Increase  |  
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mining stocks are too expensive say Morningstar equity analysts

Mining major BHP Billiton (ASX: BHP) ranks alongside global competitors Anglo American, Glencore, Rio Tinto (ASX: RIO), Teck Resources, and Vale in trading at an average 38 per cent premium to our fair value estimates.

Of the major miners, Vale is now the most expensive given its exposure to higher-grade iron ore, which is enjoying premium pricing.

BHP, at a 13 per cent premium to our fair value estimate, is the least expensive of the major miners, reflecting oil exposure where we are relatively more optimistic and less exposure to iron ore relative to Rio Tinto and Vale.

All these mining firms are rated no-moat. We raise our fair value estimate for Rio Tinto plc by 4 per cent to AUD$25 a share, reflecting higher near-term iron ore prices. For Vale, it increases 6 per cent  to US$9.40 per share with higher near-term iron ore prices and pellet premiums.

Our Anglo American valuation is up 3 per cent, with increased near-term coal prices and a higher spot palladium price, partly offset by a lower spot platinum price. Our valuation for Glencore falls 4 per cent to £2.40 per share with higher near-term coal prices outweighed by average declines in the spot prices of nickel, zinc, lead, and cobalt of 13 per cent. Our BHP fair value estimate is unchanged at £13.80 per share.

The bulk-focused miners have generally withstood recent market volatility so far, most posting share price gains since the end of June thanks to strong underlying prices for iron ore and coal. Vale has been a stand out, up 20 per cent since the end of June, reflecting the continued strength of the iron ore price and elevated premiums for high-grade ores and pellets.

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Base metals-focused miners Glencore and Teck are down 11 per cent and 5 per cent, respectively, since the end of June with weakness in the price of zinc, lead, nickel, copper, and cobalt weighing.

We now think Vale is the most expensive of the large miners, trading at a 59 per cent premium to our US$9.40 per share fair value estimate. The overvaluation reflects Vale’s high exposure to iron ore and bloated premiums for high-grade ore and pellets, which we think are unlikely to last once steel margins in China normalise. We are most bearish on iron ore as we expect China to reduce its steel consumption and for a growing amount of steel to be made from scrap.

BHP plc is the least expensive of the large miners. We think BHP is less expensive given a smaller exposure to iron ore, and the addition of oil to the portfolio where we are relatively more optimistic on the outlook. The Australian-listed shares of BHP and Rio Tinto continue to trade at substantial premiums.

The changes to our fair value estimates for large diversified miners have been relatively small, averaging a 1.6 per cent rise.

 

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Mat Hodge is a senior Morningstar equity analyst, covering the resources sector.

©2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is Morningstar's director of equity research, Australia & New Zealand.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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