Mining stocks may be on the nose today on weaker commodity prices but the share price rally in the sector is far from over.
If anything, the analysts at Macquarie Group Ltd (ASX: MQG) have upgraded their price forecasts for a range of commodities with nickel, alumina, iron ore and manganese enjoying the biggest uplift in expected prices.
This means the big share price drop of around 2% in BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) during after lunch trade is likely to be a buying opportunity as the golden run in the sector is not running out of puff just yet.
The mining-heavy materials sector is one of the best performing sectors in the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) over the past year and is only behind Information Technology and Energy.
I am expecting this trend to continue into the new financial year and I believe there is further upside for our two biggest miners BHP and Rio Tinto.
However, there are a handful of smaller miners that have experienced a bigger valuation upgrade from Macquarie.
One of these winners is Alumina Limited (ASX: AWC). The broker upgraded its share price target on the stock by a whopping 17% to $3.50 following its commodity price review.
Coal stocks Whitehaven Coal Ltd (ASX: WHC) and New Hope Corporation Limited (ASX: NHC) have also seen significant upgrades with Macquarie lifting the former's price target by 26% to $5.80 and the latter's target by 14% to $3.20 a share.
Nickel miners Western Areas Ltd (ASX: WSA) and Independence Group NL (ASX: IGO) are also big winners. Macquarie upgraded their share prices by 10% and 11% to $4.40 and $5.10 per share, respectively.
"Our preference for WSA reflects the company's strong organic growth optionality both through the development of Cosmos and potential life extensions at Forrestania," said Macquarie.
"We remain concerned that IGO will miss production and cash cost guidance for Nova in the 4QFY18, noting that WSA has only marginally outperformed IGO in 2018."
Macquarie has an "underperform" recommendation on Independence Group and an "outperform" rating on Western Areas.
The broker is also urging investors to buy shares in the larger diversified miners BHP, Rio Tinto and South32 Ltd (ASX: S32) although it has a preference for BHP.
"We retain our positive view on BHP, RIO and S32," said Macquarie. "The upgrades to our earnings forecasts have left our TSRs [total shareholder returns] for all three stocks broadly similar, however we believe the completion of the shale exit and resultant increase in capital management offer superior near-term catalysts for BHP."
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