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Why Citigroup downgraded BHP Group and one other miner

The BHP Group Ltd (ASX: BHP) share price could be facing more pressure after a top broker downgraded the stock along with another iron ore miner.

The BHP share price tumbled 1.2% to $37.02 on Thursday when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.6%. This takes BHP’s loss over the month to over 7%.

Sentiment towards the biggest miner is further dented after Citigroup cut its recommendation on the stock to “neutral” from “buy” although this isn’t the only mining stock that suffered a downgrade.

Downgrades in the mining sector

The broker has also lowered its rating on the Mount Gibson Iron Limited (ASX: MGX) share price to “sell/high risk” from “neutral/high risk” with the stock crashing 7.8% today to $1.12.

The downgrades are primarily due to the more recent run up in the share prices of both miners than on anything more sinister. The broker hasn’t made any changes to its iron ore forecasts follow a review of the commodity market although it did flag risks to the price of the steel making ingredient next year.

“The Commodities team notes that momentum built over 1Q is giving 2Q a strong base of support for commodities. The mining team’s proprietary China lead indicator (monetary conditions, fixed asset investment and capital flows) points to a further lift in the RBA commodity index,” said Citi.

“Looking out to Q2 CY20, we see material downside for iron ore, zinc, hard coking coal, oil and manganese. Conversely, we see upside for mineral sands, nickel, aluminium and copper from current levels.”

There still are buying opportunities

This gives clues to the areas of opportunity if Citi is to be believed. However, the broker did downgrade its price assumptions for other commodities like aluminium, alumina and thermal coal.

While Citi didn’t change its recommendation on other mining stocks, it did lower the price target for the Alumina Limited (ASX: AWC) share price, South32 Ltd (ASX: S32) share price, Rio Tinto Limited (ASX: RIO) share price and Whitehaven Coal Ltd (ASX: WHC) share price.

The good news is that the price target cuts look relatively modest and has a “buy” rating on these stocks.

“Compared to current spot commodity prices, it’s still a case of base metals (ex zinc) over bulks,” added Citi.

Foolish takeaway

I am bullish on the mining sector and have been over the past 2 years or so, but I am starting to trim my overweight position in the sector by taking some profit off the table.

The sector has performed very well (and let’s not forget the swath of special dividends and stock buybacks too), and while I think the sector remains well placed to perform for the rest of 2019, the easiest and best gains are probably behind it.

I am happy to sit on some cash now as I believe we will see some interesting buying opportunities over the next month or two.

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Returns As of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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